After months of behind-the-scenes planning, Charles Schwab finally has its own menu of proprietary ETFs. In November 2009, the San Francisco -based company began launching its first series of ETFs and as of mid-January had eight funds.
Unbeknownst to many, Schwab has quietly been one of the largest ETF distributors through its retail and RIA brokerage platform. And now it’s an ETF manager.
Through its $210 billion asset management unit, Schwab is rolling out a complete ETF lineup. Thus far, major asset classes like international, emerging markets and U.S. stocks have been covered. Fixed income and perhaps commodities are probably next.
Adding to Schwab’s foray into the ETF business is a series of strategic moves that could shift asset flows away from today’s dominant players. According to the company, Schwab’s 7.7 million brokerage clients can now make commission-free trades on all Schwab ETFs. Furthermore, Schwab eliminated the 12b-1 marketing fees on its ETFs in order to keep annual expenses rock bottom. Will these aggressive moves backfire on the company or will they work? And what will it mean for the rest of the ETF industry? How can advisors prepare their clients for what lies ahead?
Research interviewed Jonathan de St. Paer, vice president, product development at Charles Schwab, to talk about this and more.
How much assets under management (AUM) in non-Schwab ETF assets does Schwab have? And how does that compare to a few years ago?
Schwab clients have grown their ETF assets rapidly over the past several years. As of November 2009, Schwab had $84 billion in ETF assets, which is 31 percent above the $64 billion that we had as of December 31, 2007. This represents much higher growth than the 1 percent growth in mutual fund assets over the same period.
Schwab serves a large base of independent advisors. What percentage use ETFs in portfolio management today?
Our research indicates that 83 percent of registered investment advisors (RIAs) on the Schwab Platform actively use ETFs today, and an additional 3 percent don’t use them today but plan to in the future.
Some observers would view Schwab’s move into the ETF business as belated. How do you respond to that?
First, I’d like to clarify that our launch of Schwab ETFs is not our first move into the ETF business. For years, Schwab has been a leading platform for ETF investing; providing both retail investors and RIAs with broad access to ETFs as well as industry-leading ETF tools and research. In managing ETFs, we’re building off that strong foundation.
Second, we believe it’s only the second or third inning in the development of the ETF industry. Retail investors and RIAs have only recently begun to adopt ETFs in a meaningful way, and we anticipate that this adoption rate will accelerate going forward. Our newly launched Schwab ETFs provide a compelling solution to investors’ ETF needs today, and will also solve for the needs of investors who are only now learning about ETFs and beginning to invest in them.