Exchange-traded funds are continuing to gain traction among Charles Schwab’s clients.
ETF assets held by the firm’s clients climbed 34% in 2010, compared with 28% growth in the ETF industry overall, according to Schwab. The brokerage’s clients hold more than $111 billion in ETF assets.
ETFs are “still breaking through among retail investors,” according to Beth Flynn, vice president of ETF platform management for Schwab. Retail investors accounted for 37% of ETF assets at Schwab as of December, and their ETF assets grew 61% in 2010.
Registered investment advisers account for a little more than half of Schwab’s ETF assets, and Flynn said they are much more open to the investment products than they were two years ago.
“A couple of years ago, many firms were in wait-and-see mode; ETFs were small and nobody really knew what they were,” said Flynn. “In the last two or three years, adoption has been very noticeable, and firms have had to sit up, take notice and figure out what their strategies are going to be in this space.”
Just 15% of advisers who work with Schwab don’t have ETFs in their accounts at the brokerage, according to the firm.
The ETF industry has lots of room to run because their advantages over mutual funds have been so widely publicized, according to Flynn. But they won’t be the asteroid to mutual funds’ dinosaur, she opined.
“There are some inherent limits,” Flynn said. Mutual funds may make more sense, for instance, for investors who use dollar-cost-averaging approach. Those investors could come out ahead on commissions using mutual funds.
Mutual funds currently offer a level of active management that ETFs do not, she added. And qualified retirement plans are set up to accommodate mutual funds, not ETFs, at least for now. “It might be a matter of time before we see that (ETFs in qualified retirement plans) being more prevalent,” said Flynn.
Indeed, Schwab seems to be betting on that being the case. Schwab’s president and chief executive officer, Walter Bettinger, reportedly told a recent gathering of advisers that the company is working to create an ETF-only 401(k) program by early 2012.
Schwab also made a splash in the ETF arena in November 2010, when it closed a $150 million deal to buy Boston-based ETF manager Windward Investment Management. Windward, whose name has since been changed to Windhaven, managed $4.24 billion as of Sept. 30.
Among registered investment advisers, the most popular ETF asset class is U.S. equity, with 40% of assets allocated there. The second largest category is international equity, which has 22% of RIAs’ ETF asset allocation.