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Understanding the Goldman Sachs Momentum Builder Focus ER Index

Introduction

In this article, we will provide an overview and detailed information about the Goldman Sachs Momentum Builder Focus ER Index. This index is designed to capture market trends and utilizes a momentum-driven strategy. We will explore its composition, rebalancing process, performance, and historical weightings within the index.

Index Overview

The Goldman Sachs Momentum Builder Focus ER Index is a dynamically rebalanced synthetic portfolio. It consists of a base index, which reflects a deduction at the federal funds rate, and non-interest bearing cash positions. The entire synthetic portfolio is subject to an annual deduction of 0.65% (accruing daily).

The index provides exposure to futures-based indices in the following asset classes: focused US equities, other developed market equities, developed market fixed income, emerging market equities, and commodities. It aims to capture price momentum of the 9 underlying indices and cash using a methodology developed by Goldman Sachs & C. LLC (Index Sponsor).

Rebalancing Process

The index follows a multi-step rebalancing process:

Step 1: Historical Return Testing

On each index business day, the algorithm tests the returns of possible portfolio combinations of the underlying assets. It selects the portfolio combination with the highest historical return over different lookback periods (nine months, six months, and three months). The algorithm considers portfolios with a realized volatility of 5% or less for each lookback period.

Step 2: Determining Target Weights

The algorithm averages the weights of each underlying asset across the three return-maximized portfolios chosen in Step 1. This determines the target weight of each underlying asset for that day.

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Step 3: Daily Weight Calculation

The algorithm averages the target weights of each resulting underlying asset weight over the weight averaging period. This period includes the current day and the previous nine index business days. This calculation determines the daily weight of each underlying asset.

Step 4: Volatility Control

On a daily basis, the realized volatility of the base index is monitored using two measures of exponentially weighted moving volatility based on different decay factors. If the realized volatility exceeds 5%, a proportion of the underlying assets is allocated to a non-interest bearing deleverage cash position (the volatility-controlled index).

Step 5: Momentum Risk Control

On a daily basis, the price momentum of the volatility-controlled index resulting from Step 4 is monitored. The index allocates to the volatility-controlled index based on the weighted percentage of index business days within a 21-day period. The allocation is determined by comparing the volatility-controlled index level to its level on the 100th index business day prior.

Performance and Statistics

The Goldman Sachs Momentum Builder Focus ER Index has demonstrated strong performance, as shown in historical backtesting. The index’s annualized performance since September 22, 2014, ranges from 3.46% to 14.02%, depending on the time period.

The index’s annualized volatility during the same period ranges from 4.16% to 33.55%. The return over risk ratio varies between 0.10 and 0.58, and the maximum drawdown ranges from 15.82% to 95.81%.

Conclusion

The Goldman Sachs Momentum Builder Focus ER Index is a unique index that aims to capture price momentum in various asset classes. Its rebalancing process and methodology ensure that it adapts to changing market conditions. Investors should carefully analyze the index’s performance and suitability before considering any investments linked to it.

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