Charles Schwab first entered the ETF market in 2009 with the
rollout of four equities
, and now-15 proprietary ETFs later with more than $7.96 billion in
combined assets-the firm is hitting another milestone it deems
important:the third anniversary of roughly half of its funds.
Many financial advisors won't recommend or even consider a fund
until it has established a three-year track record, something that
four of Schwab's ETFs can claim to have done this month, with
another four reaching that mark by December and mid-January.
Schwab is excited about the occasion, hoping that its
already-successful run in the ETF business will become even more
successful as this milestone fuels further interest in its funds by
putting them on advisors' radars.
But the event could be falling on somewhat-deaf ears, if for
nothing else, because ETFs are much more transparent than other
investment vehicles-and the majority of them are passively managed.
That means waiting to see how a portfolio manager stacks up is a
"Some folks still use that three-year track record as the
investment horizon for them," Schwab's managing director of ETFs
Eric Pollackov told IndexUniverse, pointing out that hitting that
mark in November is indeed good news for the company.
"But I do think with an ETF it should be a lot less time, and by
and large it has become less, because you can see performance and
transparency, very quickly," he added.
The Schwab funds that are expected to hit advisors' radars in
the coming weeks, as well as their launch dates and assets, are as
Nov. 3, 2009, inception:
- Schwab U.S. Small-Cap ETF (NYSEArca:SCHA), $692 million in
- Schwab U.S. Large-Cap ETF (NYSEArca:SCHX), $941 million.
- Schwab U.S. Broad Market ETF (NYSEArca:SCHB), $1.18
- Schwab International Equity ETF (NYSEArca:SCHF), $884
Dec. 11, 2009, inception:
- Schwab Large-Cap Growth ETF (NYSEArca:SCHG), $496
- Schwab Large-Cap Value ETF (NYSEArca:SCHV), $425
Jan. 14, 2010, inception:
- Schwab International Small-Cap Equity (NYSEArca:SCHC), $186
- Schwab Emerging Markets Equity ETF (NYSEArca:SCHE), $580
Why Three Years?
The three-year track record requirement seems to have become a
mainstream notion among investment advisors because it's only after
a fund hits that milestone that it gets a Morningstar rating-a
metric that many turn to when making investment decisions.
That time frame would also allow the fund to capture different
parts of the business cycle, and give investors a clearer sense of
how well the fund's manager performs longer term, IndexUniverse's
ETF analyst Carolyn Hill said.
Still, Hill said that while the three-year history might be
important for actively managed funds, it's less relevant for
passive funds that are expected to track a benchmark.
"Passive funds aren't picking stocks or trying to beat the
market, so you don't need as long of a time frame to reliably
evaluate them-you just need to figure out if they are consistently
delivering the returns of their underlying indexes," Hill said.
Investors Care About Other Factors Too
"Three years is important for active funds because that's when
they get a Morningstar rating," Portfolio Solutions' Rick Ferri
agreed. "It's far less important-almost meaningless-for
plain-vanilla index funds and ETFs."
"Much more important to investors is the amount of assets in the
Schwab ETFs, trading spreads and trade volumes," Ferri added.
From an asset-gathering perspective, Schwab has done remarkably
well. Of the eight ETFs celebrating their third year, five of them
have attracted more than $500 million in assets, and one of them
has more than $1.1 billion.
It's worth noting that of the more than 1,400 ETFs in the market
today, only about 12 percent of them have managed to hit or break
through the $1 billion mark, according to data compiled by
Schwab's focus on low-cost offerings has also given it an edge
over its competitors-Schwab ETFs are the cheapest in their
respective segments-and that's not to mention the commission-free
trading offered to Schwab clients.
Robert Stein, global head of Chicago-based Astor Asset
Management-a firm that builds ETF portfolios for advisors-argues
that while focusing on the third-year milestone isn't necessarily a
metric everyone follows, it can be a relevant factor depending on
"I think the three-year mark is somewhat arbitrary, but more
relevant depending on what the ETF tracks," Stein told
IndexUniverse. "If the ETF tracks an index that has a longer track
record, the three-year time horizon is less relevant, and I would
consider other factors first."
"For ETFs that depend on the manager or some rules-based
investment approach, three years is a good benchmark," he said.
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