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Schwab Plans First Actively Managed ETF

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What You Need to Know

  • With this non-transparent ETF, Charles Schwab Investment Managemen joins a growing list of asset managers with active ETFs and ESG funds.
  • Ariel Investments is the subadvisor of the planned ETF, which is known as the Schwab Ariel ESG ETF.
  • The fund will invest primarily in small- and mid-cap stocks that meet certain ESG criteria.

Charles Schwab Investment Management is planning its first actively managed ETF, which also will be its first fund based on environmental, social and governance criteria.

The Schwab Ariel ESG ETF Strategic ETF is being subadvised by Ariel Investments, which will provide expertise on ESG; the new fund also will not disclose its actual holdings on a daily basis, as traditional ETFs do.

In its latest SEC filing, CSIM joins growing lists of asset managers with actively managed ETFs, including semi-transparent funds, and with ESG-focused funds.

The Schwab Ariel ESG ETF Strategic ETF is the firm’s first foray into the ESG space. It currently has no ESG-focused ETFs or ESG-focused mutual funds, though the Schwab platform provides access to both types of funds offered by other asset managers.

The Schwab Ariel ESG ETF will invest primarily in small- and mid-cap stocks that fall into the range of the Russell 2500 index and meet criteria set by Ariel Investments’ ESG strategy. It will trade on the NYSE, according to a filing with the SEC.

The ETF will not disclose its actual holdings on a daily basis as traditional ETFs do, but instead will post a daily proxy portfolio.

This portfolio “is designed to reflect the economic exposures and risk characteristics of the fund’s actual holdings,” including the percentage weight of those holdings, according to the SEC filing. Actual holdings will be disclosed quarterly with a 60-day lag via periodic regulatory filings.

Ariel’s Involvement

As the subadvisor of the ETF, Ariel Investments will be responsible for the fund’s day-to-day portfolio management services. To do so, it will use a disciplined bottom-up approach that picks securities based on companies’ financial performance, as well as their material ESG risks and opportunities — including risks at the company and industry level — the filing says.

Ariel’s specialized ESG analyst team also engages with companies to help companies improve their ESG performance. In addition to the analyses of that specialized team, Ariel uses over 160 data points from public, third-party and proprietary sources that are part of its custom-built ESG research platform.

The Schwab Ariel ESG ETF will also screen out companies that have more than half their revenues sourced from the the production or sale of tobacco products; the exploration for or the extraction of fossil fuels; the operation of private prisons or jails; or the manufacture of firearms, personal weapons, small arms or controversial military weapons.

The planned ETF’s fees were not disclosed in the Schwab Ariel SEC filing.

(Photo: Christopher Dilts/Bloomberg)