During widespread financial turmoil, investors are often cautious to re-enter the market. They are scared of the risk that comes along with buying a single stock, and often lack the funds to fully diversify themselves.
In recent years, we’ve seen the rise of the mutual fund industry, where pooled investment, with a money manager collects a small amount of funds from many investors and funds big block investing in a few select companies and industries. For their services, they take a cut of the earnings, along with a management fee which can be quite rewarding to them, and burdensome to investors.
But, what about investors who want to capitalize on a broad rebound? For them, an ETF may be best suited. ETF’s (Exchange Traded Funds) seek to emulate the performance of an entire index, the NYSE for example. So, during a recession when indexes are traditionally trading at a discount, these could become very popular and attractive investment vehicles as the masses return to the market.
In the second half of 2009, we have seen major players in financial services expand their ETF offerings, including Bond giant PIMCO, Charles Schwab (NASD: SCHW) launching four lost cost ETF’s, and T. Rowe Price (NASD: TROW) filing for approval to enter the arena as well.
Goldman’s announcement does serve as a bit of a surprise, since the firm’s expertise has lied in active management, and has been quite successful at that. Though, if Goldman has shown one thing in their history, it is the ability to read markets, and adapt. Following last year’s broad collapse and sell off, markets worldwide plummeted to new depths. This precipitous decline prompted many investors to think twice about investing, and pulled cash on to the sidelines, apparently hoarding it in anticipation of better future investment opportunities.
As investors trickle back into the market, an ETF may be the way they will test the waters. If they do, it should mean handsome profits for Goldman Sachs in the coming years.
