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Schwab Seeks To Offer Active ETFs

Charles Schwab, the discount broker with a growing family of index ETFs, filed paperwork with the Securities and Exchange Commission to gain the right to market active ETFs as well, which would make the San Francisco-based company more of a one-stop shop in the world of exchange-traded funds.

The company cast a wide net in the "exemptive relief" filing, asking for permission to offer actively managed U.S. and internationally focused equity and fixed-income funds, funds that are combinations of the two asset classes and fund-of-funds ETFs as well. It also said that all "future funds" that are not fund-of-funds ETFs will operate as ETFs, and may also operate as feeder funds in a master-feeder structure.

The company, which launched its first proprietary ETFs in November 2009, now has 15 equity and fixed-income ETFs with a total of $6.27 billion in assets under management, according to data compiled by IndexUniverse. Along with Vanguard and FocusShares, Schwab offers some of the least-expensive ETFs on the market, and has made clear that low pricing is at the center of its ETF strategy.

While active ETFs have yet to take off, many firms have filed to offer active ETF strategies, notably big mutual fund companies whose reputations are built on active management. Many of those companies have filed the same sort of regulatory paperwork that Schwab has, leading ETF industry sources to speculate that the filings are more placeholders than clear indicators that concrete plans are truly in the works.

Instead, the numerous exemptive relief filings queued up at the SEC are viewed as evidence that many companies recognize that the ETF is here to stay and that they need to at least lay the groundwork necessary to bring ETFs to market when they finally take the plunge and begin to put funds into registration. Schwab mentioned "N-1" registration statements in the filing, but didn't describe any specific strategies it had in mind.

The catch for many of the companies interested in rolling out active ETFs is that less than 1 percent of the $1.175 trillion now invested in U.S.-listed ETFs is in active funds. All the biggest, most liquid ETFs are index strategies, most notably the SPDR S&P 500 ETF (NYSEArca:SPY), which briefly crossed the $100 billion threshold earlier this year.

Fixed-Income ETFs Getting Traction

That said, active fixed-income ETFs are getting more traction than active equity strategies.

In fact, some of the active bond ETFs are just plain successful, irrespective of the fact that they happen to be active funds.

For example, the biggest active fund, the Pimco Enhanced Short Maturity Strategy ETF (NYSEArca:MINT), has $1.44 billion in assets, and the No. 2 active ETF, the WisdomTree Emerging Markets Local Debt Fund (NYSEArca:ELD), has $1.20 billion in assets. That's serious money in the fund industry.

Moreover, the exchange-traded fund industry was all abuzz last week with the rollout of the actively managed Pimco Total Return ETF (NYSEArca:TRXT), an exchange-traded version of the eponymous $250 billion mutual fund, the biggest in the world.

The Total Return Fund in an ETF wrapper began with $100 million in seed money, and now has $134.6 million in assets, according to information posted on Pimco's ETF website.


Schwab noted in the exemptive relief filing that the approval it is seeking is similar to other approvals the SEC has already granted to firms seeking to market active funds. That essentially means that any Schwab active funds would be transparent and would have to disclose their portfolio holdings daily.

It also said the relief it is requesting regarding feeder funds in a master-feeder structure in much the same way the SEC granted Boston-based State Street Global Advisors per a petition that company submitted.

"Exemptive relief" grants firms exceptions to certain sections of the Investment Company Act of 1940, and is the first step companies must take to earn the right to market ETFs. It often takes anywhere from six to nine months, and sometimes longer, for a company's first ETF to come to market.

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Copyright ® 2012 IndexUniverse LLC . All Rights Reserved.

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

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

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