Charles Schwab (NYSE:SCHW) is the largest custodian in the world, with $1.4 trillion under management. The discount broker made a splash when it launched a set of ETFs less than a year ago. Those funds have already gathered $1.5 billion in assets.
Are you seeing more investors and advisors shifting out of mutual funds to ETFs, or do ETFs complement your current offerings?
Both. I think we’re seeing a couple things. Advisors and investors have an increasing preference for passive strategies, and ETFs are a beneficiary of that. When people choose passive strategies, they choose ETFs.
At the same time, ETFs are $800 billion industry-wide and mutual funds are $7-$8 trillion, so ETFs are a piece of the overall picture.
I think [mutual funds and ETFs] are going to coexist. ETFs will have the lion’s share of passive assets and mutual funds will be the preferred vehicle for people who want active strategies. Passive strategies will continue to creep up as part of the share of the overall pie, but people will want to have active management.
Does that mean you don’t think actively managed ETFs will catch on?
I’m a bit of a contrarian on that. Everything we do here starts from client needs, and I don’t have any clients asking for actively managed versions of T. Rowe or the Janus 20 fund. I think they’re happy with actively managed mutual funds. If you look at the ETFs’ ability to trade intraday, that’s not really relevant for active funds. I do think that where I see it is more in intelligent indexing, fixed-income, places where transparency is an advantage, where people want to know what their funds are holding. But in active equities, I don’t see it as a huge opportunity.
As the largest custodian of ETF assets in the United States, where do you see the ETF industry going?
It’s continuing to grow. We need to demystify them; to most investors, it’s another three-letter acronym. We’re trying to explain to them how they should be used, their advantages, pitfalls and so on. We have an ETF Center on Schwab that people can go to and find very approachable pieces on how to trade and use ETFs.
In Schwab ETFs, we had $1.5 billion in assets in roughly eight months – that’s been great. We had high expectations for client demand, and it exceeded those. It’s really come from three segments: RIAs, more active traders and more mainstream buy-and-hold retail investors. There’s been a nice pickup across all three segments.
More broadly, we have $90 billion in assets at Schwab across all ETFs – that’s grown 38% year-over-year. The investments we’ve made to position Schwab as ETF HQ, we’ve seen that pay off, as well.
Are you seeing attention outside of Schwab clients for your ETFs?
We’ve seen some, but it hasn’t really been our focus. Our focus has been serving the needs of clients and the relationships we have with them. Over time, more clients will take an interest, but we’ve put very little effort toward drawing that interest because we have such a huge opportunity with the RIAs and individual investors that we work with today.
What does Chuck Schwab think about ETFs? Does he use them, too?
He loves them, and he uses them for his own portfolio, without a doubt. He is one of the strongest advocates of ETFs at Schwab. It goes back to his roots: Chuck has always stood for asset allocation, low-cost investing, tax-efficiency and ETFs. He was an early adopter and has been a very strong ally and advocate.