Goldman Sachs wants more wealthy clients to invest with it and is betting even more "boomer candy" options will help.
The Wall Street bank on Wednesday said it would pay up to $2.25 billion to acquire NEOS Investments, a provider of actively managed exchange-traded funds with $30 billion in assets.
NEOS specializes in ETFs that use options strategies to maximize regular payouts and limit tax bills. They are part of a growing class of investments which use a combination of derivatives to give investors upside from stocks or dividend payments without as much risk.
Only a few years old, these products have been a hot draw among older investors who want to capitalize on surging markets while still protecting their savings, earning them the moniker "boomer candy." Among the most popular versions are so-called buffer funds, which explicitly limit downside for investors while also capping gains.
Goldman cited a Morningstar report that the overall market for these derivative-funds has grown to $180 billion, a 70% compounded annual growth rate.
Goldman has been pouring more money into growing its asset- and wealth-management business. Wealth advisers want more investment options to meet their clients' specific purposes, including protecting against market drops, paying out more regular income and minimizing tax bills. To meet those demands, Goldman is gobbling up active-ETF managers, having bought Innovator Capital Management for some $2 billion earlier this year.
The bank will now be the eighth biggest active-ETF manager, it said Wednesday.
"They're really tailored to individual situations, and people have used them as building blocks in their overall portfolio," said Marc Nachmann, global head of asset and wealth management at Goldman. "We think it's going to accelerate growth."
Derivative funds are similar to structured notes, financial instruments that combine a bond with an embedded derivative, which have long been sold on Wall Street.
Buffer funds, which tend to cost less than a structured note, have become popular as an aging population of baby boomers weighs the risks and rewards of investing as they near retirement. Many have kept a big chunk of their portfolios in cash. There is over $3 trillion in retail money-market funds, hovering around a record high, according to the Investment Company Institute.
Their financial advisers are pushing products that purport to offer better returns than money-market funds, after taxes, but limit the chance a market swoon will ruin their long-awaited retirement.
The risk is that investors pay up for a product that underperforms the market.
Take this year, for example: NEOS's fund tracking the S&P 500 is up about 8% year to date, according to its website, compared with an over 10% increase in the S&P 500 index. Since the fund was created in 2022, it has cumulatively returned 71%, versus a 96% return in the index.
NEOS was founded in 2022 and its offerings mostly focus on maximizing regular payouts for investors. With a typical S&P 500 ETF, investors get quarterly dividends from the underlying companies. NEOS's SPYI aims to maximize monthly income, using a mix of dividends, interest and selling options. The fund has an annualized distribution rate of 12%.