March 9, 2011

Schwab Publishes ‘Select List’ to Help Investors Pick ETFs

‘Investors tell us that selecting an ETF can be an overwhelming experience,’ says Schwab’s Flynn

Schwab published 'The ETF Investor: 2010 in Review' along with its new 'ETF Select List' Schwab published 'The ETF Investor: 2010 in Review' along with its new 'ETF Select List'

Charles Schwab & Co. announced Wednesday the release of an exchange-traded funds “Select List,” a tool designed to help retail investors break through the thicket of ETFs that have sprung up in the marketplace and find low-cost funds suitable for their portfolios.

“With a thousand ETFs now available and more coming out weekly, investors tell us that selecting an ETF can be an overwhelming experience,” said Beth Flynn, Schwab vice president of ETF platform development, in a statement. “Our goal is to help our clients make informed choices about these increasingly popular investment vehicles.”

Flynn said in a separate interview that the quarterly ETF Select List’s “design target” is average retail investors looking to put $5,000 into an ETF and hold onto the investment for at least a year.

Created by Charles Schwab Investment Advisory Inc. (CSIA), the Select List filters all of the ETFs in the marketplace to highlight pre-screened, low-cost funds that can be used to fill portfolio gaps. CSIA, a Schwab affiliate, is an independent registered investment advisor (RIA) and serves as the investment advisor for Schwab Managed Portfolios.

To accompany the Select List, Schwab published a companion piece, The ETF Investor: 2010 in Review, a collection of research from CSIA that offers data on ETF usage by Schwab retail investors and advisor clients. The review, which functions as an advanced primer explaining everything from ETF operating expenses to equity ETFs and beyond, supports RIAs’ efforts to educate individual investors about ETFs. It is available to advisors who custody with Schwab through SchwabAdvisorCenter.com.

Michael Iachini (left), CSIA’s director of Investment Manager Research, is the author of the review's commentary as well as the ETF Select List’s fund picker. Iachini recommends that RIAs use the ETF Select List as a tool to validate their own research.

To be eligible for the Schwab ETF Select List, a fund must meet certain minimum requirements for criteria such as assets under management, length of

track record, trading volume, bid-ask spread, tracking error of the ETF to its underlying index and number of competitive market makers.

Regular AdvisorOne commenter and Global Trends Investments President Tom Lydon (pictured here) quipped in a comment on his ETFtrends.com website that the new Schwab ETF tool “dumbs down” the ETF selection process for investors “who are overwhelmed by the sheer number of choices available these days.”

“Schwab’s move is a smart one, given that a recent Cogent Study showed that seven out of 10 investors don’t even know what an ETF is,” wrote Lydon on his website ETFtrends.com. “For those getting their first exposure to the market, the list of more than 1,000 funds could overwhelm even the most savvy investor.”

The release of The ETF Investor coincides with the findings of Schwab’s ninth Independent Advisor Outlook Study. Earlier this week, Schwab reported that ETFs remain advisors’ investment vehicle of choice. Eighty-four percent of RIAs participating in Schwab’s semi-annual Independent study say they currently use ETFs, with 31% indicating they plan to invest more in ETFs during the next six months.

Advisors cite a number of reasons they find ETFs particularly appealing in client portfolios. The most common is diversification, followed by their utility in maintaining market exposure while making portfolio adjustments. Using ETFs to manage risk in client portfolios was cited third.

Retail investor ETF assets grew by 61% in 2010 and account for 37% of the total ETF assets custodied at Schwab. Retail traders account for 12% of ETF assets. Independent RIAs accounted for 51% of ETF assets at Schwab at the end of 2010. ETF assets overall grew by 34% at Schwab to $111 billion at the end of 20102.

Read about Schwab’s ninth Independent Advisor Outlook Study at AdvisorOne.com.

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