Behind Goldman’s $2.3B Deal for NEOS Investments

What are our options?

Asset managers are growing increasingly determined to bring options-based strategies, traditionally tools of institutional and accredited investors, to the masses. Goldman Sachs is emerging as one of the more aggressive forces in the trend. The investment bank announced yesterday that it will acquire NEOS Investments, which focuses on active, derivative income ETFs, in a deal worth up to $2.3 billion. The purchase will add 19 active income ETFs and $30 billion in assets to Goldman’s lineup of options funds. The announcement comes only a few months after Goldman completed its acquisition of Innovator ETFs, the creators of the first buffer exchange-traded fund, another derivative-driven product. With NEOS, Goldman will oversee just over 220 options ETFs.

“People talk about democratization of alts when they discuss evergreen vehicles that have been created,” said Marc Nachmann, Goldman’s global head of asset and wealth management. “This is another democratization of sophisticated products that large institutions have used for a long, long time that is now available to everybody.” He added that he expects a long-term shift to options strategies among clients. “People want to have income-earning assets in their portfolios,” Nachmann told Advisor Upside. “Structured notes have been around for a long time, so this isn’t a particular moment. It’s a building block in the portfolio.”

Boomer Candy

Options ETFs have proliferated in recent years for several reasons. The US is experiencing a massive retirement wave, with more than 50 million American adults having exited the workforce. Many older clients are looking to generate income while preserving assets. “The demographics have really helped raise the profile of these types of ETFs,” said Zachary Evens, Morningstar analyst.

The ETFs also tend to carry higher fees than passive funds, giving asset managers competing with mega-issuers an opportunity. “Index strategies is a contest that smaller issuers will rarely win, so many went into this options space following investor demand,” Evens told Advisor Upside.

According to Morningstar Direct data:

• Derivative income ETFs have brought in nearly $41 billion in assets so far this year.
• Meanwhile, defined outcome funds have gained roughly $6 billion in the same time.

“We call these types of funds ‘boomer candy,’” said James Seyffart, senior analyst at Bloomberg Intelligence. “They were selling well, even without the Goldman brand name, so it’s probably easier to just acquire at this point than grow your own business.”

Major acquisitions of options-based issuers are still in the early innings, with Goldman leading the charge. However, in May, WisdomTree completed its acquisition of Atlantic House, a London-based active manager specializing in defined outcome and derivatives-driven investment strategies.