Charles Schwab, the money management firm that now ranks as the 10 th -largest ETF provider in the U.S., today is launching its new lineup of six fundamental ETFs linked to Rob Arnott’s Research Affiliates’ methodology that will go head-to-head with a lineup from PowerShares, among others.
Schwab’s funds come to market with what the firm says is competitive pricing, even if not the cheapest in the segment, according to IndexUniverse’s ETF Classification System. Ranging from 0.32 to 0.46 percent in annual fees, the six ETFs built around Russell fundamental indexes that rely on Arnott’s RAFI methodology are still some 25 percent cheaper than the average fundamental ETF on the market today.
The six funds, five of which already exist in mutual fund wrappers with a combined $4.5 billion in assets gathered since their launch in 2007, are also going to be part of Schwab’s OneSource platform—a broad free-ETF trading program that involves 90 non-Schwab ETFs as well as its own proprietary funds launched in February.
“Asset allocation and portfolio construction need to reflect new market realities,” Schwab’s Tony Davidow said in a recent interview. “There’s a value in combining active and passive strategies, and we believe fundamentally weighted strategies represent an evolutionary step forward.”
Arguing that each individual investor needs to have a portfolio that’s organized around risk appetite and goals, Davidow said that there’s significant value in combining market-cap and fundamentally weighted strategies—and even including actively managed funds in the mix for better risk-adjusted returns and a “smoother ride” over time. Active management, he told IndexUniverse, serves as a good downside protector in times when the markets—and the passive ETFs tracking them—turn south.
“Fundamental strategies break the link with price and have historically delivered excess returns relative to market-cap equivalents,” Davidow said.
The funds include:
- Schwab Fundamental U.S. Broad Market Index ETF (NYSEArca:FNDB), which seeks to track the Russell Fundamental U.S. Index. It costs 0.32 percent.
- Schwab Fundamental U.S. Large Company Index ETF (NYSEArca:FNDX), which seeks to track the Russell Fundamental U.S. Large Company Index. It costs 0.32 percent.
- Schwab Fundamental U.S. Small Company Index ETF (NYSEArca:FNDA), which seeks to track the Russell Fundamental U.S Small Company Index. It costs 0.32 percent.
- Schwab Fundamental International Large Company Index ETF (NYSEArca:FNDF), which seeks to track the Russell Fundamental Developed ex-U.S. Large Company Index. It costs 0.32 percent.
- Schwab Fundamental International Small Company Index ETF (NYSEArca:FNDC), which seeks to track the Russell Fundamental Developed ex-U.S. Small Company Index. It costs 0.46 percent.
- Schwab Fundamental Emerging Markets Large Company Index ETF (NYSEArca:FNDE), which seeks to track the Russell Fundamental Emerging Markets Large Company Index. It costs 0.46 percent.
The PowerShares Matchup
PowerShares also offers an extensive roster of RAFI-linked ETFs—18 in total—that look to provide investors with access to fundamentally weighted strategies that complement market-cap approaches.
The most successful of those competing funds is the $2.24 billion large-cap PowerShares FTSE RAFI US 1000 (PRF). PRF, which costs 0.39 percent, looks to be comparable to FNDX, the new Schwab ETF targeting large U.S. companies.
FNDX comes in with a cheaper expense ratio that, again, is 0.32 percent, and it looks like Schwab will have bragging rights of having cheaper Arnott-linked fundamental ETFs than does Wheaton, Ill.-based PowerShares.
Like Schwab’s new lineup, the PowerShares family of fundamental ETFs also has Arnott’s methodology behind it. But Schwab’s Russell-linked ETFs go about measuring value a little differently, as Arnott himself recently pointed out.
While the PowerShares RAFI fundamental ETFs screen securities by book value, cash flow, sales and dividends, Schwab’s roster of funds using the Russell variation will focus on adjusted sales, operating cash flows, dividends plus buybacks.
“It’s a different flavor,” Arnott said, noting there are several market-cap indexes out there that also track similar segments of the market. “We wanted to make very sure we just didn’t introduce clone product. We wanted to give customers a choice, so we made sure the individual measures were different.”
“What we find is that the year-by-year performance of the two series is different—the character of the two series is different,” he added. “The Russell series has a bit less of a deep value tilt, and that shows up in having, on average, less in financials over time than FTSE RAFI. But in the long run, their performance is nearly identical.”
In both cases, they break the link between a company’s price and its weight in a given portfolio, Arnott said.
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