Investing in the 1,000 largest U.S. companies became cheaper and the competition between low-cost index providers got stiffer when Charles Schwab rolled out its index ETF comprising the 1,000 largest U.S. stocks on Oct. 11.
The Schwab 1000 Index ETF (SCHK) has an operating expense ratio of five basis points (0.05%) and is available on Schwab ETF OneSource, the firm’s commission-free ETF platform. The firm says rival products have charges of between 10 and 15 basis points.
The new ETF will be the 22nd fund in Schwab’s ETF lineup. Schwab introduced its first ETF in 2009 and currently has $88 billion in ETF assets. It is the fifth-largest ETF provider after BlackRock (iShares), Vanguard, State Street (SPDR) and Invesco (PowerShares).
“We launched the Schwab 1000 Index and mutual fund in 1991 to help investors participate in the innovation and long-term growth of the largest 1,000 stocks in the U.S. in a simple and cost-effective way,” said Charles Schwab, the company’s founder and chairman, in a statement. “I’m thrilled that investors can now benefit from the potential growth of these firms with the ease and efficiency of a low-cost ETF.”
Marie Chandoha, president and CEO of Charles Schwab Investment Management, said the new ETF provides “one more affordable way” for Schwab’s “wide range of investors with different needs” to access the U.S. stock market.
In Defense of Index Investing
As the popularity of index investing has surged, so has commentary citing concern about its growth. These concerns are often presented under attention-grabbing headlines.
In its October ViewPoint, BlackRock — which manages the iShares ETFs — considers some of the questions being raised. The concerns have two themes, it says.
Some commentators have asked whether index funds — index mutual funds and exchange-traded funds — have the potential to distort investment flows, create stock price bubbles or, conversely, aggravate a decline in market prices.
Others have focused on index investing, stock ownership and competition and ascribed higher consumer prices, escalating executive compensation and aspects of wealth inequality to index investment products; academics call this “common ownership,” i.e., ownership by a single entity of shares of multiple companies in an industry.
According to the BlackRock paper, overall asset allocation decisions of asset owners drive investment flows into different asset classes and sectors. Index funds are merely a vehicle for asset owners’ views; the funds themselves do not drive equity market prices or individual stock prices.
Absent index funds, it asserts, these asset allocations decisions would be executed through an alternative means, such as active funds or individual stocks.
Despite what headlines say, active strategies dominate both stock trading and information sources used in price discovery, according to BlackRock. Index investing comprises only some 20% of global equities, with index funds and ETFs representing 7.4% of global equities.
Even though index investing is growing more rapidly than active strategies, BlackRock believes the balance in market share between the two is self-regulating. It says the market share of index investments is not at the point where pricing inefficiencies have opened up; even if it did, active managers would benefit from opportunities to profit from short-term fluctuations in individual stock price.
This could improve active performance and would likely attract asset flows back into active management, which in turn would result in a new equilibrium between the two styles.
The BlackRock paper points out several benefits of index investing:
Index funds provide capital to many companies across size, geography and sector;
Index investors take a long-term view on companies they hold, providing stability;
Large index fund sponsors actively engage in investment stewardship; and
Index funds democratize access to diversified investment portfolios.
BlackRock notes that several global trends are driving adoption of index investing strategies. For one, awareness is growing of the value proposition they offer in striving to track rather than better a benchmark index.
For another, investors and regulators are increasingly focused on fees and transparency. Plus, changes to brokerage and advice models have led investment advisors to act less as stock or fund selectors and focus more on building diversified portfolios, often delivered through index funds.