Goldman Sachs Joins Bond ETF Party

By Liz Hoffman Features Dow Jones Newswires

Goldman Sachs Group Inc. launched an exchange-traded fund Thursday that gives investors a cheap way to invest in corporate bonds.

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The fund, which launches with $50 million, tracks an index of bonds issued by investment-grade rated companies.

It is one of three new funds Goldman plans to launch in the coming months that track fixed-income assets, branching out from traditional ETFs that mostly mirror baskets of stocks. The other two will focus on emerging-market government debt and riskier, low-rated corporate bonds, according to recent regulatory filings.

Bond ETFs have emerged as a lucrative niche on Wall Street in recent years, promising buyers the steady income of bonds in a package that is as easy to trade as stocks. The ETF industry is still dominated by stock products, which account for more than three-quarters of the roughly $4 trillion in exchange-traded products, according to BlackRock Inc.

But their growth has sparked concerns from the Securities and Exchange Commission and others that their popularity, combined with thin markets for many of the underlying bonds they hold, are a recipe for trouble during times of market turmoil.

The worry is rooted in the fact that many corporate bonds don't trade often. So if the bond market declines and ETF investors head for the exits, fund managers might not be able to meet redemption requests without further driving down prices, exacerbating a downturn.

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"The obvious risk -- perhaps better labeled the 'liquidity illusion' -- is that all investors cannot fit through a narrow exit at the same time, " Bill Gross, the well-known bond investor and portfolio manager at Janus Henderson, wrote in 2015.

Goldman's fund can invest up to 15% of its assets in illiquid bonds. These are defined as instruments that couldn't be sold within seven days at the prices at which Goldman values them, according to a prospectus filed in March with the SEC.

The Wall Street firm launched its first ETF in 2015 and now has 10, part of its effort to grow its asset-management arm and grab a share of the passive-investing craze.

The funds have attracted $3 billion so far, mostly by undercutting the competition on price. Most of Goldman's funds are priced at or slightly less than comparable offerings from low-cost giants like Vanguard Group and BlackRock.

Goldman's new bond fund charges investors 0.14% a year, versus 0.15% for a similar ETF run by BlackRock.

That is in contrast to Goldman's traditional businesses of trading and investment banking. For those, the firm is known for elite services that carry big fees.

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

June 08, 2017 08:44 ET (12:44 GMT)