A Glimpse Into Goldman Sachs' ETF Holdings

The year is 2007, and while markets seem healthy on the surface, behind the curtain, a financial crisis is looming. Slowly but surely, the sub-prime mortgage crisis was building as highly levered institutions were lending, almost at will, to anyone who could open a line of credit, leading to numerous defaults and setting off the worst recession in U.S. history. All the while, two traders at Goldman Sachs (NYSE: GS  ) had been shorting mortgage-backed securities, and were eventually responsible for $4 billion in profits during these tumultuous times. Though allegations eventually came to surface that Goldman was both supporting these securities to clients and simultaneously shorting them behind closed doors, the not-so-honorable actions of Goldman Sachs have kept it afloat, and helped it continue to be the bellwether leader in the financial world. Plain and simple, ethics may not always be the main priority at Goldman, but they certainly know their way around markets, and how to profit from them [see also Five Defensive ETFs to Own When the Market Corrects].

While many may focus their efforts on the negatives associated with this powerhouse institution, Goldman continues to be one of the most important investment banks in the world. Headquartered in lower Manhattan, Goldman has its hands in all kinds of financial operations, including asset management, underwriting services, proprietary trading, and much more. Many investors look to this firm for advice on investments and comments on how the economy has been performing. But what may surprise traders around the world are the individual holdings that make up a large part of Goldman's investment portfolio: ETFs [see also ETFs With Significant Goldman Sachs Exposure].

As ETFs being to surge in popularity with major institutions and complex traders, more and more big names are climbing aboard to utilize products that boast low costs and, perhaps more importantly, unparalleled intraday liquidity. Though ETFs have been slow to pick up steam among retail investors, more educated traders and sophisticated investors have quickly embraced these products as much more efficient alternatives to mutual funds, especially for achieving broad exposure to important benchmarks or sectors of an economy. Below, we outline several ETF holdings from one of the largest investment banking firms in the world, giving investors of all kinds insight into the portfolio of one of the world's most famous investment banks.

SPDR S&P 500 (NYSE: SPY  )
SPY is by far the world's most popular ETF, and is also one of the most popular investment vehicles, period. This fund tracks the S&P 500 index and changes hands an average of over 150 million times per day. The top holdings of this fund feature the who's-who of U.S. large-cap firms, including Exxon Mobil (XOM) and Apple (AAPL). This ETF spreads its assets across numerous market segments and invests primarily in giant-cap companies. Thus far in 2011, this product has generated handsome returns of just under 7%, while paying out a dividend of 1.94% [see also Talking ETF Weighting Methodologies With Tony Davidow].

Some may be surprised to see SPY as the largest holding in the Goldman portfolio, coming in with 42.2 million shares for a grand total of a $5.6 billion dollar investment. To anyone well-versed in the ETF world, this large allocation makes perfect sense, as SPY is a very liquid product that offers great exposure to the big names in the U.S. economy. However, for their most recent fiscal quarter, Goldman sold 301,000 shares of this ETF, suggesting that their interest may be peaked for this fund. Though SPY is still the top holding, and this only represents a 0.7% decrease, it may point to the fact that Goldman is less bullish on large-cap stocks than it used to be.

iShares MSCI EAFE Index Fund (NYSE: EFA  )
EFA is yet another of the most popular exchange traded products in the world, with an average volume around 18 million shares and $40 billion in AUM. This product seeks to replicate a benchmark that measures the performance of equity markets in European, Australasian, and Far Eastern markets. Top holdings in EFA feature major global players like Royal Dutch Shell and Siemens (SIE), though the fund is careful to not overweight any of its 950+ holdings. From a country perspective, EFA dedicates the majority of its assets to the U.K. and Japan, while many other big names still take home a significant slice of the holdings. 2011 has seen this product gain over 4% while maintaining a strong dividend yield of just over 3.1% [see also Highlighting Some "EAFEC ETF" Options].

This product also accounts for a significant portion of the Goldman portfolio, as its $1.2 billion dollar value comes from the ownership of over 20 million shares. This quarter saw the major investment bank cut back on its EFA holdings, continuing its trend of pulling out of large caps. The firm sold roughly 926,000 shares, representing a 4.3% decrease in the overall position. But while Goldman has been scaling back on most of its large-cap holdings, its next ETF holding represents a growing trend for the firm.

iShares Russell 2000 (NYSE: IWM  )
IWM represents the small-cap sector of the U.S. market, and like the aforementioned products, is one of the most popular ETFs in the world, changing hands over 56 million times per day. This product seeks to find the next big growth company by investing in approximately 2000 different securities from various sectors in domestic equities. IWM just celebrated its 11th birthday and has provided its investors with a 6.1% return on the year [see also Here's an Idea: Small-Cap BRIC ETF].

What is most surprising about Goldman's IWM allocation is the fact that it is the second largest holding in the portfolio, an atypical spot for a small cap fund to sit. IWM represents $2.6 billion of Goldman's holdings, with 30.5 million shares held, and this quarter saw a major increase in holdings of the product. The investment bank tacked on 10.4 million shares this quarter, a 52% increase from its previous position. It is clear that Goldman is incredibly bullish on small caps, and the firm is more than comfortable using ETFs to gain access to these young and budding companies.

Small-Cap Options
Investors looking to trade like Goldman Sachs have numerous small-cap options to help capture the trend that this major firm has been bullish on. Apart from IWM, investors have several small-cap options in the ETF space. Below, we briefly outline various small-cap funds to help investors sort through the small-cap space [see also Definitive Guide to Micro-Cap ETFs: Micro-Cap ETF Investing 101]:

  • iShares S&P SmallCap 600 Index Fund (NYSE: IJR  ) : This S&P-issued fund measures the performance of roughly 600 small-cap companies. IJR spreads its assets relatively evenly across various market segments though it does feature a slight bias towards the technology sector. This ETF has gained 7.5% this year.
  • Vanguard Small-Cap ETF (NYSE: VB  ) : VB represents nearly 1750 small companies, none of which have a weighting higher than 0.40%, giving this fund incredible diversity. This fund offers competitive pricing, with one the lowest fees in the space, sporting an expense ratio of just 0.15%. VB is up 8.3% on the year.
  • Schwab U.S. Small-Cap ETF (NYSE: SCHA  ) : This product represents stocks ranked 751-2,500 by full market capitalization of its respective index and is float-adjusted market cap weighted. SCHA features a slight tilt towards industrials. This product is up 7.8% on the year, and features an even lower expense ratio of just 0.13%.
  • iShares Russell Microcap Index Fund (NYSE: IWC  ) : This product focuses on micro-cap investments, which are even smaller and more volatile than small-cap firms. But with higher risks come the potential for higher rewards. IWC favors the technology sector, and has gained 2.7% on the year.

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Disclosure: Photo courtesy of Daniel Schwen. No positions at time of writing.

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