Earlier this month, Charles Schwab (SCHW) caught the attention of cost-conscious investors everywhere when the company announced the launch of its low-cost (or in some cases, “no-cost”) exchange-traded funds. With more than 5 million clients and over $1.3 trillion in assets, Schwab is one of the largest investment advisory and brokerage firms in the world, but the ETF industry is new territory.
So far, so good.
The four funds introduced by Schwab earlier this month have already accumulated more than $125 million in assets, and daily trading volumes on each have steadily increased since the launch. The funds currently offered by Schwab include:
- Schwab International Equity ETF (SCHF): Provides exposure to international large-cap and mid-cap companies in over 20 developed markets.
- Schwab U.S. Broad Market ETF (SCHB): Seeks to track the almost 2,500 stock Dow Jones U.S. Broad Stock market Index.
- Schwab U.S. Large-Cap ETF (SCHX): Provides exposure to large-cap U.S. equities
- Schwab U.S. Small-Cap ETF (SCHA): Provides exposure to small-cap U.S. equities
|Ticker||Market Cap||Avg. Volume*|
|*For week ending 11/20/09|
Taking “Low Cost” To The Extreme
ETFs have become popular in part because of their reduced cost structure relative to actively-managed mutual funds, many of which charge management fees in excess of 1.0%. Schwab has become one of the most popular brokerages in the world in part because of its reduced cost structure relative to the competition, an approach that the firm has copied in its ETF business. Schwab’s ETFs compete directly with more established funds from iShares, Vanguard, and State Street, but are cheaper than most comparable funds.
Schwab is also offering commission-free trading for clients who trade online through their Schwab ETFs, a feature that can result in significant savings for active investors and could translate into huge cash inflows to these funds. Noting that current Schwab investors likely have billions in competing funds, Dave Nadig at Index Universe thinks that $100 billion in assets by the end of next year for Schwab isn’t far-fetched. It’s obviously way too soon to know how big of a player Schwab will become in the ETF industry, but the early returns are promising. So far, it seems that investors, whether existing Schwab clients or not, have embraced the new low cost ETFs.
Despite its encouraging initial success, Schwab is still one of the smallest ETF issuers around, and current assets under management would a rounding error to Barclays Global, which has more than $340 billion. Schwab is planning to launch four additional ETFs in December, including an emerging markets fund and an international small-cap equity fund that could become immediate hits with investors, given the trends towards “ex-U.S.” funds that have emerged over the first ten months of 2009.
Disclosure: No positions at time of writing.