Goldman Sachs new ETF targets non-megacap tech stocks around the world

Sung Cho, Goldman Sachs Future Tech Leaders Equity ETF Portfolio Manager, joins Yahoo Finance Live to break down Goldman Sachs' new tech ETF that could shake up ETFs like Cathie Wood's Ark Innovation.

Video Transcript

- Goldman Sachs is getting thematic on tech. The investment bank just launched the Goldman Sachs Future Tech Leaders Equity ETF. It looks to position investors and future tech Giants, seeing as so many investors are overexposed to today's tech leaders such as Facebook, Amazon, and Google.

Sung Cho is a portfolio manager for the ETF and joins us now. Sung Cho good to see you this morning. Congrats on the launch.

SUNG CHO: Thanks so much. We're very excited.

- Yeah, it's refreshing to see an ETF not focused on FAANG stocks. Take us through this launch and why you made it.

SUNG CHO: Yeah so we launched the GTEK ETF strategy because we noticed that there was a growing disconnect between where investors are positioned and where we're seeing the most attractive returns in tech over the next decade or so.

So for the last 20 years, as you know, innovation has been focused primarily in the US and primarily in a handful of mega-cap tech companies, but we believe we're now at a key inflection point where the innovation is expanding beyond the US, as well as down the market cap spectrum.

So we wanted to offer clients a solution that really shines a spotlight on this next set of future tech leaders by having a strategy that focuses on the next wave of innovation by excluding any companies with greater than $100 billion in market cap and having 50% of the fund in non-US names, as well as targeting 25% to 35% of the fund in the emerging markets.

And then we also decided to package it as an ETF wrapper, because that offers our clients the benefits of greater tax efficiency, greater transparency, and greater liquidity as well.

- And just taking a look here in terms of your top holdings, you have Marvell Technology, MercadoLibre, HubSpot, and Workday, really being the top holdings. But again, those just at or under about 3% of the overall ETF. Wondering how you really come to determine what some of these holdings should look like and the characteristics that you look for in companies that you think might become that next major tech leader?

SUNG CHO: That's a very good question. So we reveal about 1,000 or 1,000 plus names that we believe are within our investable purview. And we have a very, very high bar for what we include in the fund. So we only choose 60 to 80 names at any given point in time. In terms of what we look for, we look for, first of all, very big addressable markets, right?

So large addressable markets that companies have can grow into for a decade. We also focus very much on terminal profits. So we think sometimes tech investors lose sight of the fact that, not every growth should be treated the same. We care very much about profit growth, not necessarily about just revenue growth.

That also brings me to my next point, which is we care a lot about valuations. So we do a lot of scenario analysis of what the future can hold and we've got to make sure that the valuations are correct. And then the last thing is we look for strong management teams that are shareholder-friendly, right? We want to make sure that they care about shareholder returns as well.

JULIE HYMAN: Sung, it's Julie here. Should we be thinking about this product as an alternative to Ark Invest?

SUNG CHO: So, yeah. You know, we have a tremendous amount of respect for Cathie Wood as an investor and for the business that she's built. And we fundamentally agree that we need to get investors on the right side of disruption. But how we approach this problem is very different, relative to our competitors, not just Ark.

First of all, we're more global. So 50% of our investments are non-US and we believe we're uniquely positioned to be able to take advantage of all the analysts that we have around the world. So we have analysts based in Asia, we have analysts based in Latin America, we have analysts based across the emerging markets to really be able to diligence and identify the next tech leaders.

And so, you know, we're significantly a much more global, leveraging our global capabilities. We're also focused on, as I talked about earlier, anything that has a market cap of less than $100 billion. So we're very much focused in small, instead of more of an all-cap strategy that a lot of our competitors have. And then the last thing I'd point out is that we're not new to thematic investing. You know, we run $20 billion in thematic assets and we've been running tech-dedicated portfolios for over 20 years now.

JULIE HYMAN: You know, and the other thing I want to ask you is if you compare it to basically anything that invests in these types of products, you get an enormous amount of volatility, right? And in the case of something like RK, it's down on the year. And so does that sort of come with the territory with these kinds of investments? Is that what people should expect? That, "Yes, there's the opportunity for big reward with some of these names, but there's also a lot of volatility along the way."

SUNG CHO: That's absolutely correct. There is going to be a little bit more inherent volatility associated with investing in companies with faster growth, because they're not as established in terms of what the future looks like and so there's going to be a lot of inherent volatility. That being said, we do take a little bit more of a balanced approach towards investing.

So we not only do we look at disruptors, which are the fastest growing part of the tech universe, but we also look out for compounders as well as evolvers, value stocks that potentially have the chance to have an inflection point that can generate lots of returns. So because of the way that we balance the portfolio, we think we could offer better risk reward while still investing in disruption for our clients.

- And part of the play on this, I would imagine, is that the next decade for technology we'll see many new leaders rise to the service. But for those investors holding these FAANG stocks because they've treated them so well over the last 10 years, what does their next decade look like?

SUNG CHO: Look, I think the FAANG stocks have tremendous moats, but I don't think what investors saw in the past is what the returns that they should expect going forward, right? So very simplistically, it's really a math issue, right? If you're a $2 trillion plus company, you have to create $200 billion of economic value to actually generate 10% shareholder return, right?

So we can argue about where the valuations or where the multiple should go, but in terms of a pure economic return, you have to create $200 billion of economic value, which is really, really hard to do. There's not that many $200 billion market cap companies.

And so I think these are still great companies, tremendous barriers to entry, and are going to be the leaders of the future still but just this types of shareholder returns that we expect going forward should not be what we expect, what we experienced over the last decade.

- We'll leave it there. Sung Cho, portfolio manager for the new Goldman Sachs Future Tech Leaders Equity ETF, congrats on the launch. We look forward to following it moving forward.