ETF Edge - Goldman Sachs’ big bet on defined-outcome funds 12/8/25

Episode Date: December 8, 2025

Goldman Sachs announcing a plan to buy Innovator Capital Management for $2B. We get the inside perspective on where else that deal could take them… and how those types of funds of being employed more and more within the marketplace.    Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds, you're in the right place. Every week we're bringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors.

I'm your host, Dominic Choo. Now, as Goldman Sachs pushes deeper into wealth management, it is buying defined outcome ETF provider, innovator capital management. Here is my conversation with Brian Lake, the co-head of third-party wealth at Goldman Sachs Asset Management, alongside Nick Ryder,

the chief investment officer at Kathmere Capital Management. Gentlemen, thank you both for being with us here in studio for ETF Edge. Great to be here. All right, so let's talk a little bit first about this big deal. It's only about a week, rather, since it's been announced. But it's been possibly years in the making, given some of the trends that we've seen.

in the actively managed ETF market, Brian. So why Goldman Sachs asset management and why innovator capital management and why is it a good tie-up? Yeah, well, you talked about it. Goldman Sachs is really committed to our asset and wealth management business.

Our asset management business, in particular, $3.5 trillion asset manager or the eighth largest asset manager in the world, we're top five public active, we're top six in private alternatives. But as we think about the major trends that our clients are talking to us about, It's an active ETF space.

And so we have this leadership position in public active, but we know we need to deliver more to them in that way. And so we've got our active ETF business that we've been building for years now. We're really proud of that business. We're going to continue to invest in that. But to accelerate us down that path, we did this deal with Innovator. We've loved that business for years. We've known the founders.

We've known the team. We're really excited about this space that they've invented, the defined outcome space. And so when you brought all those pieces together, it really just made a ton of sense. How much of this story for Goldman Sachs GSM, Goldman Sachs asset management, going after Innovator, is driven straight up by the demand for these types of products.

We've been talking about buffer ETFs to find outcome ETFs for some time, but this seems to me like a very big bet on the future of these types of instruments. So what exactly is the maybe main driver, if you will, for what happens? So if you think of the identity of Goldman Sachs' asset management, we focus on the really kind of sophisticated area of the markets and solving those problems for investors. So whether that's direct indexing, whether that's evergreen alternatives,

or whether that's active ETFs, that all kind of lives in the same neighborhood for us. And so we think the entire active ETF space is interesting, but defined outcome in particular is a very fast and attractive space to us. It's solving particular problems for investors. They're looking for income, they're looking for downside protection, they're looking for further growth. And it's kind of on this critical path of innovation that's happening in the marketplace right now, where more and more investors are using defined outcome ETFs in their portfolios. And so it was incredibly complementary to our identity as an asset manager. And it was also at this really exciting point of the growth curve of defined outcome ETFs, which we think could four to

five X over the next five years. This is a big deal for sure. From an independent, you know, investment advisors perspective, Nick, when you take a look at some of the products that are out there from ETFs and how they've evolved. These defined outcomes are basically something that maybe more advisors are starting to look more closely at right now. Are you one of those types of advisors and just how much do your clients on the high net worth or ultra high net worth side of things want to use these types of products as opposed to other wealth management strategies that have been in place for decades at this point?

Yeah. For instance, these have, as you mentioned, existed for quite some time, whether it be in the structured product arena, whether it been an option overlays within investment portfolios. We think there's both the client demand for these. We also see a role for them in portfolios. The way we kind of categorize many of these, and for us, it's really coming at the angle from equity exposure with downside protection built in is oftentimes how we're thinking about this. And we fit these more in what we call a risk-aware growth bucket, where it's enabling our clients to have access to public equity markets, but with some measure of systematic

downside protection built in. How much, Nick, from your perspective, do you think about using these types of products in the ETF wrapper? Cookie cutter is not the right way to look at it, but it becomes packaged, right? You have a product that you can buy right off the shelf and it does the things that you want to do, as opposed to having a separately managed account for a client that then you actively put options overlays or hedging type strategies in place to enhance or try to get the same kind of outcome. Which is the more desirable outcome for you? It'll depend client by client situation by situation, as do many things in investment in portfolio management.

You know, we look at the cost side is a consideration in there. There's the operational ease. Obviously, the ETAF vehicle, the operational ease side is infinite there in terms of being able to have same holding, same portfolio construction across a multitude of clients and manage that scale. On the cost side, right, as competition is intensified in this space, right, the costs are very much reasonable. And oftentimes what we see is in line with what you're looking at within the, yes, SMA space. And so, you know, generally speaking, we have plenty of clients where we do option overlays on top of that separately managed accounts. We also have model portfolios constructed of ETFs, leveraging many of these types of defined outcome strategies, as well as other risk managed equity

strategies. The interesting part about this, Brian, because we brought up the fee idea here, it's not that these things just happen willy-nilly. There is a cost to transaction-wise or anything else to putting these kinds of structures together. I think about the type of of buffer or defined outcome product that we have today. And it was very much an ETF product today, but that was a structured or some kind of a nuanced product for high net worth or accredited investors just 10, 15, 20 years ago, aka hedge fund like strategies. So if you look at the costs for a hedge fund type product 20 years ago versus what the

ETF cost for a similar type of outcome is today, how exactly do they compare? Well, there's a big difference. And by the way, you're just thinking about costs as like an expense ratio, but what about convenience like Nick talked about? What about the intraday liquidity that the ETF wrapper brings? What about the comfort of mind of knowing exactly what you own because of the transparency that's provided? So when we're talking to investors right now, they're thinking about all of these things holistically. And so, of course, they're making sure that they're paying a fair price for the vehicle that they're getting exposure to, but they're actually taking in a number of different things in the account, how they're serviced from the, asset manager, the performance, the totality of the product offering, the website. All of these different things play into that equation. And what you're seeing, and you're making this point down, is that when you take all those into account, put this into the ETF wrapper, the benefits to investors are immense. From an RIA's perspective, if you take a look at the way that these products are being used, are you seeing a ramp up on your side of things, not just from your shop in particular, but

maybe across the industry from independent RAA's perspective, are they starting to kind of dabble more, traffic more in these actively managed ETFs that target outcomes? It's definitely seemed that way, absolutely. You know, on our end, where I can speak obviously most intelligently about where we've used it a lot is for clients where we're looking for public equity exposure, but there's this desire, whether it come from the client end or from our perspective of saying, we want public equity exposure on the upside, but we want to have some systematic approach to protecting on the downside.

So we look at these defined outcome buffer products sitting right alongside perhaps equities with cover calls or trend following equities where there's systematic rules-based approach to get you out of the market during those sell-offs. For us, ultimately, we know that over the long haul, one of the biggest determinants of investment success or failure is going to be how an investor behaves. Equities go up and they go down over the long haul. They tend to work their way upwards to the right. But we know through years of experience, right, the ride is anything but smooth. And so if we're able to build portfolios that our clients can feel comfortable and have conviction and ultimately have that discipline to ride out the markets inevitable downside, all the better.

And so for us, this category of these risk-managed equity solutions, we think, plays a role in a portfolio. And that's where our adoption has really been driven by. So it's an interesting point because we talk about the drawdowns. And oftentimes those drawdowns can trigger behavior, whether it is about kind of getting in at the right time or out at the right time. We know that timing in the market is one of the toughest things to do for any investor. out there. To that point, Brian, what I'd like to do is talk about one of the larger

ETFs in terms of A-U-M that this product that Innovator is putting out, and that's the B-A-L-T-E-T-F, which is basically an S&P-500 tracking instrument that puts those kind of buffers in place to limit upside and downside at the same time. If you look at the one-year chart, it's pretty telling, right? That one-year chart goes back and shows the kind of tariff tantrum in the markets from April. If you look at the way that the market spiked lower, and you look at the B-alt ETF versus the general S&P 500, you can kind of see that blue line on the screen there is the B-alt ETF, the one that kind of caps exposure up or down, right, to some of those moves. Meanwhile, the orange line there is the S&P 500 ETF that everyone knows, right? The spider.

What exactly is the benefit, right? Why would somebody want that blue line on the screen as opposed to the orange line, even though they know that the orange line over the past year has more than doubled the return of the blue line B Alt-TTF. Yeah, I think Nick made the perfect point, and he's expert at talking about this as well,

but investor behavior sometimes drives your performance much more than the point to point on January 1st to whatever we are today, December 8th. If you weren't invested going into this, you didn't get that exposure, and so there's a lot of cash on the sidelines right now, and so if I'm a investor or financial advisor are talking to clients and I'm saying, hey, I know markets are close to all-time highs.

Here are the types of tools that we can start to use to get you equity market exposure. That's a really important thing to my practice and to investors to get their long-term returns that they should be getting from equities. At the same time, the market does that, the tariff tantrum that we kind of talked about, if you sell at that moment, you panic, and when do you get back in? Are you getting back in a month later, two months later, or are you still waiting for that opportunity to get back in? So the complementary nature of both of those things, the best portfolios are using all of these tools to design the perfect outcome for what investors are trying to achieve.

And so, you know, I think these charts tell a heck of a story there of this is a way to smooth out your ride over the long haul and not try to time the markets, but make sure that you're in the market to participate. How much, Nick, we look at those two charts, how much is the kind of, I guess, appropriateness for a risk tolerance level in that conversation with you and your field? clients, meaning if somebody is, say, 30 to 40 years old and maybe is okay with the orange line profile volatility in return, as opposed to say somebody who's 50 to 60 years old, who maybe still wants that kind of exposure, but is not willing to tolerate the more extreme downside risk. So, demographically speaking, it might make sense, but just how much are advisors using it in that context?

and how are they marketing that to their clients? Yeah, I think it's absolutely that. And, right, demographics, the age of the investor can play a role, right? We also look at just the individual's ability and, you know, ability to take risk, their willingness to take risk, right? Their psychological disposition and how comfortable are they seeing their portfolio move up and down, right? We do fully believe and recognize that over the long haul, straight, low cost, plain, vanilla,

passive exposure to the market, highly likely deliver a superior return over 10, 15 years relative to one where we are building in structural downside protection. That said, not everybody can live from A to Z. What's most important is that we get them from A to Z. These types of products certainly play a role in there. And the age can be a factor of it. It's just also that willingness to take the risk and deal with the ups and downs. And there's many ways we try to go about trying to assess that.

Because also, too, right, an investor's assessment of their risk tolerance today may look very different than it did in March of 2009 or of April of this year. everybody can say after the market's been rallying strongly for a number of years. Of course, I'm comfortable taking risk, but we know that it's ultimately the stressful moments when the true investors risk tolerance shines, and that's where we need to understand and make sure we've built a thoughtfully structured portfolio

that can ultimately enable the client to get to the long term. There's no doubt the ETF market has become much more sophisticated with just the product offerings that are out there. There are tools, in essence, to do all of these things. Brian, the other thing that you mentioned before that I want to hit on here is we talk about these defined outcome type products, these actively managed ETFs as a bigger umbrella.

But buffers are not the only thing that are part of that kind of suite of products. There are other types of instruments that use similar strategies to obtain certain targeted outcomes. I can think of income being one of those ones we talk about quite a bit right now. What exactly does the innovator deal

and what exactly is GSM's overall take on just how much these tools will matter in the coming, years and decades to service some of those needs. Yeah, I think of, you know, I think of like the S&P 500 is kind of like an acoustic guitar, and then you can plug it into an amp or you get an electric guitar and you can make all these different noises out of it, but you still have this kind of reference instrument with that. And so the defined outcome space is kind of that space. So, you know, we talked about

income oriented strategies. The covered call category has grown rapidly over the last decade, and investors are continuing to look for income in their portfolios. And so we certainly see that playing out. Goldman has some leading capabilities on the active premium income side. And so we're participating in that. We've talked about the target buffer thing. We were talking about Balt a second ago. You know, some advisors talk about bonds in their portfolio is even though you might be a little bit younger profile, you still need to eat your vegetables. And we're actually seeing B-alt be used as a bond alternative, B-alt. And they're taking that and using it as bonds instead of kind of the core equity exposure as well. And so there's this like third dimension of portfolio

construction that's starting to happen with these tools that are happening. And then the third area is kind of these growth areas. And you know, you can get, you know, accelerated returns from this. We're seeing dual directional start to play an interesting way in auto callables as well, which can not circle us back around into the income side of things. And so the whole kind of space is you've got this reference asset and then now using, using options, relatively straightforward strategies that have been used in portfolios for years now, but the innovation being putting it into an exchange-traded fund and listing it on an exchange is now giving investors all these different dimensions that they can deliver these outcomes for their investors and for their own portfolios.

Brian, how sophisticated does a user of these tools need to be? Because in essence, what you're talking about are products or strategies that have been reserved for very, I guess, sophisticated investors in the past, but are now very democratic, democracy-wise, accessible to vast portions of the investor population based upon the use of the ETF wrapper. Just what does an investor or trader need to know about these types of products so that they ultimately do the job that they are supposed to, given the risk-reward profile of each of those instruments? Yeah, investor education is something that we are completely laser-focused on. If you look at the innovator website, the tools that they provide for investors to make informed decisions around

these are extremely sophisticated and they're very intuitive and easy to use. We, of course, when we're talking to individuals, talk to your financial advisors, make sure that you're getting financial advice from those individuals. That's not what we're kind of in the business of doing. But what we are seeing is that as investors start to use these tools, they understand how they move and they're starting to be able to incorporate them into portfolios in that way. So education is always the first thing. You know, when ETFs first came out 30 years ago, that was a big part of it. When fixed income ETFs first came out, you know, 20 years ago, that was a big part of it.

Making sure that people understood how these products were going to work and to incorporate them into their portfolio is always kind of paramount. One of the benefits of the ETF is it's on exchange and it's transparent. You can jump on the website and see exactly what you own within your portfolio. real time today. And so the ability to educate yourself, understand what you're getting in the portfolio is extremely high. But of course, we encourage people to make sure that they understand what they're buying. That's true for every investment. Sure. And to kind of cap the conversation off, if we talk Nick about just the level of investor sophistication, many of the clients

that you service and other, you know, R.A. service are relatively smart in terms of how they manage their money. They wouldn't be as successful as they are unless they did. But to what degree has that knowledge curve evolved for your clients, say at Kathmir, over time? Are they becoming more sophisticated as the decades kind of go by? Or do you feel as though there is still a general sense of, I guess, maybe a gap in information for how even high net worth investors view some of their instruments? Yeah, I think as many things it runs the gamut. We have clients that are very investment sophisticated, right?

they enjoy staying up to date on these things, doing the reading, they're doing the research, engaging me and my team on these conversations, and very much like playing a role in the management of their portfolio. And the information availability in the world today, obviously, unprecedented relative to five years ago, 10 years ago. And so clients are able to do that. We also have other clients that have been very successful in their professional lives, and they say, look, my expertise is in running my business

and building my company, generating wealth. I trust you, Nick and your team to manage my wealth form. And so it runs the gamut. Again, Innovator puts a lot of effort into obviously the investor education that comes through on our end and being able to see how these strategies are performing, understand the upside, the downside scenarios of these. With many of portfolio construction, we ultimately look for that clear line of sight. At all times with all assets, we don't have a great understanding of what role is it playing

in our client's portfolio? How can we expect it to perform in good times? How can we expect it to perform in bad times? That just gives us a clear line of sight when we ultimately try to build out a diversified portfolio. All right. One final question to you, Brian. Goldman Sachs asset management, as you point out, very large footprint in terms of asset management on the ETF side of things and everything else. Just what kind of commitment will Goldman be looking to make in the coming years towards the ETF space,

specifically when it comes to active? Yeah, I think we've made a pretty big commitment right now, and we're just going to continue to execute down that roadmap. I mean, we've talked about the innovator strategy. That also comes with 70 people from the innovator team that we're thrilled to have. They bring a tremendous amount of ETF DNA to the equation and a great level of sophistication combined with the existing Goldman Sachs team, which is a really powerful, thoughtful, and well-educated team as well. We think that we've positioned ourselves really well to serve clients going forward and we're excited about our ETF strategy. Now it's time to round out the conversation with some thoughtful analysis and perspective to help

you better understand ETFs with our Markets 102 portion of the podcast. Nick Ryder, the CIO at Kathmir Capital, continues with us right now. Nick, I want to kind of pick up this conversation for the podcast on something that we kind of ended on, which was just the level of sophistication that many of your investors now have. Has it gotten to the point in your mind where they are now coming to you maybe with some ideas, pitching kind of where the opportunities could be? And what exactly is that conversation like when you deliberate what a good investment might be? Yeah, ultimately, again, it's within the construct of the investor's total portfolio

in making sure it's helping them to achieve their investment objectives. We'll often look at depending what the idea is saying, where does this fit in the portfolio, and to the extent we add it to a portfolio, where will we be funding it from? And how will that alter the expected risk and return of the portfolio? And so, you know, the conversation is very much a two-way dialogue where our client will bring us an idea. We'll like to have a thoughtful dialogue around, hey, what is the investment thesis behind this? How could it ultimately work well? What would the downside look like?

What would the scenarios be? And then funded appropriately within the portfolio. So again, we're keeping the entirety of the portfolio well aligned with the end client goals and objectives. Now, when we talk about some of the ideas that are floating around right now between you and your investment committee, your senior management team at Kathmir. One of the things that we want to look at is maybe how things are shaping up this year for your clients, what they can expect for the next maybe call it two to three weeks as we approach the end of the year, and how exactly you get set up for 2026. What exactly is maybe the overriding theme that you are telling your clients about what you think 2026 will look like?

Yeah, for us, the big theme right now is one of making sure we have resiliency built into the portfolio and the way we're going about that is diversification. Right now, right, one of the main stories in markets has obviously been the last number of years, the AI-driven narrative around the markets, and the, what's, you know, the leadership among the largest of large mega-cap growth stocks, right? The Mag 7, the hyperscalers in the universe have really propelled the markets higher, right? Their fundamentals have been fantastic. Their earnings growth has really been unprecedented.

These companies have driven the market higher. What's happened, though, with those companies as they've become bigger and bigger, their valuations have increased. Their size within the S&P 500, for instance, is also increased. So the top 10 names in the S&P 500 now accounting for north of 40% of the index. Those companies, again, fabulously profitable, but their profit share of the S&P is only 32% are changed. So what we're looking at is saying,

hey, it's been an awesome run for these companies. Let's just make sure that the portfolios truly sufficiently diversified. And so that could be opportunities outside of the mega-cap growth segment. It could also be opportunities outside. of U.S. equities as well, right? We know that around the globe, the U.S. equities make up about 65% of global market cap. 35% of it's still foreign companies. We want to make sure we have adequate exposure there to not knowing exactly what will the outperformers in the future, but make sure we have exposure to outperformers wherever they occur. Where exactly are you finding some of those

opportunities? I mean, as of this taping for this podcast, you know, Ed Yardini, Ardeni research, a name that many of our audience knows, kind of made a pretty, decently bold call saying that maybe now is the time to maybe shy a little bit of more away from the Magnificent Seven towards the, I guess what he calls it, the impressive 493, other parts of the S&P 500 that may be better growth opportunities in the coming quarters and years than what the Mag 7 has done. If you believe that, and it sounds like you do, what exactly are those places that you are kind of funneling your clients towards right now? Yeah, and there's a variety of different forms this could happen. One would be simply taking the S&P 500, but instead of holding it in

companies in proportion to their size as a traditional cap-weighted approach, you could take an equal-weighted approach, right? Own all 500 stocks in equal proportions. In effect, that's tilting you away from the largest of large of the mega-cap stocks and down more into the mid-cap space. And by the way, there is an ETF that, or there's a suite of ETS. The suite of ETS, one that we've used with clients is the Goldman product, GSCW being the ticker. So that's an opportunity. Another way we look at it would be staying again within the large cap space, but making a discrete allocation to value strategies. And so that could come in the form of a cap-weighted value strategy, something like Vanguard Value Index, where it's just the opposite side of growth. Alternatively, we do it via what would be called factor-oriented strategies where it's all called a little bit more sophisticated version of targeting the cheaper stocks, applying sector constraints to it.

So there are ETFs from iShares and JPMorgan or two that we've used in the past, as well as some other more concentrated, differentiated ways of approaching large-cap value. Alternatively, we've looked at small-cap equities as a relative opportunity, and that could be across the spectrum on small-cap, just a broad small-cap market index, or even further tilting within the value segment within small-cap. And then, of course, there's the entire global opportunity set where whether it be developed or emerging markets, and to the extent one was, again, further. comfortable taking a value tilt, we would be in support of that as well.

If you were to be wanting to take a value tilt, I guess, in your portfolio, and you didn't have somebody like you or a formal investment advisor kind of taking the reins, so to speak, what exactly is your view of where those compelling opportunities are right now from a sector standpoint within the S&P 500. Mag 7 is very typically focused on tech first and foremost. You could say communication services and to a large degree consumer discretionary, with a couple of the names there, Amazon and Tesla being those two. But from a sector perspective, when you say value, what part of value is the most compelling

to you? Yeah. We'll often look at it again. If we do cap-weighted value, it's going to be much more heavily in health care. and in utilities and in financial stocks. That would be one way it's going about that. What we'll often look at some of the more novel approaches to value will be saying, hey, I don't want to take a sector bet, but I just want to own the cheaper stocks within each sector.

So within technology, I still want to have market cap exposure to technology, but instead of being in the most expensively valued stocks in the tech, let's just go into the cheaper stocks within tech. Do the same thing within financials. Again, this idea being that valuation is ultimately predictive of future returns, and there's a value premium in the market and that cheaper stocks will ultimately outperform, but without necessarily taking these sector bets

because one might not want to have a sector exposure taking this implicit overweight or underweight on specific sectors, but just simply say, I think a lot of stocks have gotten a little bit carried away. No doubt their fundamentals are strong, their earnings growth has been as strong, but if they're carried by this popular narrative, it's possible they're just overpriced in the current environment

and thus set to underperform, so let's just tilt our way into the cheaper stocks and out of the more expensive names. You also mentioned just a few moments ago this idea that certain factors are standing out, right? So when we talk about factors, broadly speaking, we talk about things like, you know, quality factors or momentum factors or valuation factors.

There's all different kinds of factors that go in to kind of how you view certain aspects of the market developing. From a factor standpoint, Nick, what factors are the most important to you? right now? I think it's value at this juncture. Again, if you look this year, value and momentum have done both quite well. And it's very interesting to see that happening at the same time, because momentum is going to be what's been winning recently, obviously, the propensity to continue to win. Value is much more of a longer term mean reversion. Sorry, it's been quite interesting

to see both in the U.S. market as well as foreign market. You have seen both value and momentum stock selection strategies outperform. It's quite remarkable you look. on non-US value, for instance, up more than 40% this year. So for us, value looking forward could be a great place to be. Again, the discounts on value relative to the overall market are at pretty significant levels relative to history, right? It's axiomatic that value is always cheaper than the overall market, but there are times values even cheaper than normal.

We're at one of those times. All we're looking for is some bit of a mean reversion in that, and you can see outperformance from that. And one last question before we let you go. value as a factor also has many different sub factors in it. We can think about things like price to earnings ratios, either trailing or forward. We can think about things like dividend yield. We can think about things like price to sales. From your perspective, what's the kind of bigger influence on how you determine what quote unquote value is? Yeah. In a way we outsource that to the

various fund providers, the index providers that are constructing these indexes. I am generally speaking a favor of the let's use a composite of metrics so that we're not overly reliant on one specific metrics. So whether it be a composite of trailing price rate price earnings ratio forward, incorporating price to sales, perhaps incorporating good old price to book value and a prize value multiples, free cash flow multiples, I think having these different metrics that you're using to build a composite to define value ultimately adds more resiliency and robustness when we're building a value portfolio, right? Accounting distortions in the more recent years when you've had the economy become more reliant on intellectual, right, intangible assets as opposed to hard tangible assets,

factory, plant, property equipment, things like that. Price earnings, price to book could be distorted. I think relying on some of these other metrics to define value will ultimately benefit investors over the long haul. All right. Nick Ryder, CIO at Kathmir Capital Management, thank you very much for taking the time to be with us here. Thank you, Dom. All right. That doesn't for ETF Edge, the podcast. Thanks very much for listening. Join us again next week. We'll just head over to etfedge.cnbc.com. InvescoQQQ believes new innovations create new opportunities. Become an agent of innovation. InvescoQQQQ, Invesco Distributors, Inc.