Schwab Plans ‘Fundamental’ ETF Lineup

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Charles Schwab, the online brokerage that markets 15 exchange-traded funds with the lowest expense ratios on the U.S. market, filed regulatory paperwork this week putting into registration a lineup up ETFs that will use so-called fundamental indexes, with five of the proposed funds being replications of open-end mutual funds it already runs.

Fundamental indexing, pioneered by Rob Arnott's indexing firm Research Affiliates and by the ETF firm WisdomTree Investments, is gaining currency in the world of exchange-traded funds, as the universe of "pure beta" market-capitalization strategies is largely accounted for.

All the proposed ETFs, which don't yet have a price tag, will have their primary listings on Arca, the New York Stock Exchange's electronic trading platform. The funds, their proposed tickers and the indexes on which they will be based are as follows:


  • Schwab Fundamental U.S. All Company ETF , which will trade as "FNDB" and be based on the Russell Fundamental U.S. Index
  • Schwab Fundamental U.S. Large Company ETF , which will trade as "FNDX" and be based on the Russell Fundamental U.S. Large Company Index.
  • Schwab Fundamental U.S. Small Company ETF , which will trade as "FNDA" and be based on the Russell Fundamental U.S. Small Company Index
  • Schwab Fundamental International Large Company ETF , which will trade as "FNDF" and be based on the Russell Fundamental Developed ex-U.S. Large Company Index
  • Schwab Fundamental International Small Company ETF , which will trade as "FNDC" and be based on the Russell Fundamental Developed ex-U.S. Small Company Index
  • Schwab Fundamental Emerging Markets Large Company ETF , which will trade as "FNDE" and be based on the Russell Fundamental Emerging Markets Large Company Index

The filing comes after San Francisco-based Schwab late last year hired Tony Davidow from Guggenheim Partners to head up Charles Schwab Investment Advisory to deliver advice on how investors should build portfolios across active funds as well as cap-weight and fundamental indexes.

to spearhead Schwab's initiative to expand its fundamental fund footprint via the ETF wrapper.

Such strategies, which Arnott jokingly called "active management in drag" in an interview with IndexUniverse last summer, are designed to isolate certain factors such as earnings, cash flow, dividends and book value, and are often considered to be tilting strategies that favor small-cap and value stocks over larger, more well-established names.

Arnott's RAFI indexes are behind one of the biggest broad fundamentally focused funds, the PowerShares FTSE RAFI 1000 Portfolio (NYSEArca:PRF), which has assets of about $1.7 billion, according to data compiled by IndexUniverse.

Schwab Fundamental Mutual Funds

The fundamentally focused mutual funds Schwab already markets, ticker symbols, net annual expense ratios and assets under management are as follows:

  • Schwab Fundamental US Large Company Index Fund ( SFLNX ), 0.36 percent, or $36 for each $10,000 invested. The fund has $2.1 billion in assets.
  • Schwab Fundamental US Small Company Index Fund ( SFSNX ), 0.35 percent, and the fund has $670.6 million in assets.
  • Schwab Fundamental International Large Company Index Fund ( SFNNX ), 0.36 percent, and the fund has $574.8 million in assets.
  • Schwab Fundamental International Small Company Index Fund ( SFILX ), 0.55 percent, and the fund has $104.5 million in assets.
  • Schwab Fundamental Emerging Markets Large Company Index Fund ( SFENX ), 0.61 percent, and the fund has $346.7 million in assets.

The five mutual fund portfolios use the same indexes as will the proposed ETFs.

The "Russell Fundamental" brand name of the indexes belies a connection to Rob Arnott's Research Affiliates.

The Russell indexes use RAFI fundamental screens and are based on an agreement between Russell and Arnott's Research Affiliates.

The indexes on the mutual funds were put in place last October, and replaced the original set of indexes-also based on Arnott's system-that have the same "FTSE RAFI" branding as does the PowerShares ETF "PRF" mentioned above.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs


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