Charles Schwab burst onto the ETF scene several years ago with
a lineup of broad market
. These funds saw a huge level of interest, pulling in billions
largely thanks to the rock-bottom expense ratios and the
availability of free-trading on Charles Schwab platforms.
This system has allowed Schwab to build up a sizable $13.5
billion in ETF assets, a pretty good level considering the
company had just 15 funds in total. It appears as though Schwab
isn't done with its push into the ETF space though, as the
company has just released six new ETFs that look to once again
steal market share from some entrenched competitors.
However, these new products will go a bit beyond the current
lineup of Schwab offerings and will use fundamental factors to
weight securities, instead of just market capitalization. These
will all use the 'RAFI' methodology developed by Rob Arnott that
seeks to break the link between price and weight, using items
like cash flow, adjusted sales, and dividends plus buybacks in
order to measure company size (see
Alternative ETF Weighting Methodologies 101
This will cost a bit more than the offerings that Schwab
currently has on the market, but they will be far cheaper than
many of the other fundamental ETFs currently out there. Thanks to
this and the free-trading program, these products could attract
some interest from investors, though it will likely be a
relatively tough battle.
For investors intrigued by this approach, we have highlighted
the six new funds in brief detail below:
US Broad Market Index ETF (FNDB) -
This product tracks the Russell Fundamental U.S. Index, holding
roughly 1,450 stocks in its basket. Costs come in at 32 basis
points a year for this ETF, which focuses on a wide range of
firms in the U.S. market.
Financials take the top spot at roughly 15.5% of assets,
followed closely by energy (14.1%) and consumer discretionary
(13.2%). Top individual holdings go to ExxonMobil (4.1%),
followed by other oil firms Chevron (2.2%), and ConocoPhillips
US Large Company Index ETF (FNDX) -
This new fund follows the Russell Fundamental US Large Company
Index, once again charging 32 basis points a year in fees. The
product holds roughly 600 stocks in its basket, and it has a
large cap blend focus.
Energy and financials take the top spots from a sector look at
just under 15%, closely followed by tech and consumer
discretionary (respectively at 12.7% and 12.5%). The top three
holdings are the same here as they are in FNDB, though there is
slightly more in terms of concentration for this ETF (see
Active Large Cap ETFs: The Best of Both
US Small Company Index ETF (FNDA) -
For a small cap approach, investors have this ETF-which also
costs 32 basis points-that tracks the Russell Fundamental US
Small Company Index. The product holds about 870 stocks in its
basket and it has a small cap blend focus.
Industrials take the top spot at roughly 22% of assets,
closely followed by financials (20.9%), and then consumer
discretionary (19.1%). The top individual holdings focus on
a trio of airlines with LUV, DAL and UAL taking the top three
spots, but accounting for just 1.9% of assets in total.
International Large Company Index ETF (FNDF) -
For investors seeking international developed market exposure,
FNDF is a new possible choice. The product follows the
Fundamental Developed ex-U.S. Large Company Index charging 32
basis points a year in fees, and holding just over 725 stocks in
Once again, financials are the top spot, accounting for the
biggest chunk of assets, though industrials, energy, and consumer
discretionary are not too far behind. Top individual holdings
include a decent number of well-known firms, including BP, Total,
and Royal Dutch Shell (see
Time to Buy the Hedged European ETF?
International Small Company Index ETF (FNDC) -
If small caps are more your style, FNDC may be an interesting
choice. The product tracks the Russell Fundamental Developed
ex-US Small Company Index, charging 46 basis points a year and
holding about 1,100 stocks in its basket.
Top sectors for this ETF include industrials, consumer
discretionary and financial, while the product is light on
utilities, energy, and health care. Top stocks aren't really the
most famous names-a bunch of small cap Japan stocks-while no
single stock makes up more than 0.3% of the portfolio.
Emerging Markets Large Company Index ETF (FNDE)
For a focus on emerging markets, investors could consider this
product which follows the Russell Fundamental Emerging Markets
Large Company Index. The product charges 46 basis points a year
in fees, and holds roughly 275 stocks in its basket.
Energy takes the top spot for this ETF, followed by financials
and materials, while consumer staples and utilities bring up the
rear in terms of exposure. For individual securities, two Russian
energy companies-Lukoil and Gazprom-take the top two spots, while
Samsung and China Mobile round out the top four (see
Are BRIC ETFs in Trouble?
The main competitors to the new half-dozen funds from Charles
Schwab look to be other products that utilize the RAFI
methodology. While there aren't direct competitors to all of the
new Schwab funds, we have briefly touched upon some of the most
PowerShares FTSE RAFI US 1000 (
) - $2.1 billion in assets, 39 basis point expense
PowerShares FTSE RAFI 1500 Small-Mid (
) - $700 million in assets, 0.39% expenses.
PowerShares FTSE RAFI Developed Markets ex-US (
) - $585 mil in AUM, 0.45% expenses.
PowerShares FTSE RAFI Emerging Markets ETF (
) -$350 mil in AUM, 0.49% expenses.
Fundamental Pure Large Growth Portfolio (
) - $90 mil in AUM, 0.39% in expenses.
Any of these products could be fierce competitors for Schwab
and their new lineup of RAFI funds. However, Schwab does look to
have a cost advantage-especially for Charles Schwab
brokerage clients-so we will have to see if their new set of ETFs
can make inroads and continue Schwab's rise in the ETF
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