The last few quarters have been very good for Charles Schwab (NYSE:SCHW), with the company consistently beating street estimates thanks to the Fed’s rate hikes. However, the company’s Asset Management and Administration Fees have fallen steadily over this period due to a string of recent fee reductions – something we detail in our interactive dashboard titled How Has Charles Schwab Client Asset Mix Trended? Below, we take a closer look at the drivers of Schwab’s asset management revenues and the company’s strategic initiatives aimed at gaining a larger share of the rapidly growing ETF market.
How has the U.S. ETF industry trended?
After the financial crisis of 2008, exchange-traded funds became the retail investor’s primary investment vehicle as it provides an opportunity to diversify risk and invest in multiple asset classes. Since then, assets under management (AUM) in ETFs have jumped from $531 billion in 2008 to $1.4 trillion in 2013, and finally to over $3.8 trillion now. ETFs are increasingly gaining popularity thanks to low operating expense ratios (OER) as well as commission-free trading incentives provided by various issuers and brokers.
Charles Schwab launched its ETF OneSource platform in 2013, enabling its clients to purchase 105 ETFs with no trading commissions. Since then, the platform has expanded its offerings to more than 500 ETFs, including those by other leading industry providers such as Invesco, JPMorgan and Oppenheimer Funds among others. The share of ETF net flows into the platform’s ETFs has increased staggeringly from 38% in 2015 to 49% in 2018.
What has Schwab gained from ETF OneSource Platform?
Per the below chart, Schwab’s equity & bond fund and ETF average fee has dropped by a sharp 43% in the last three years. However, the asset based has swelled by 130% over the same period. Though stiff competition has forced Schwab to slash fees, this had a positive impact on ETF assets. Notably, proprietary ETF assets swelled by 240% to $134 billion during the same period. Though, the platform includes offerings by 15 other issuers, Schwab’s proprietary ETFs have benefited the most – helping the company’s market share in the ETF industry increase from 0.7% at the time of the platform’s launch in 2013 to 3.6% in 2019.
With the increasing popularity of ETFs among millennials, an overall shift is observed in Schwab’s client asset mix. The share of ETFs in client assets has increased from 10% in 2016 to 15% in 2019, resulting in an equal decline of mutual funds. With net interest revenues and trading commissions dependent on market forces such as repo rates and volatility, the asset management operations provide a stable cash flow for the company. Despite its sub-par performance in recent quarters, we believe that asset management revenues will drive Schwab’s top line in the long term as it continues to consolidate its presence in the global ETF market.
The Trefis price estimate for Charles Schwab stands at $47 per share, which is in line with the market price. You can view our interactive dashboard on How have Charles Schwab’s earnings fared in recent quarters? to observe the quarterly revenue trends and modify yearly earnings to gauge the impact on the stock price, and see more of our financial services company data here.
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