Charles Schwab is a bit late to the party with its new U.S. Aggregate Bond ETF -- but the company may use its brokerage platform to help even the playing field.
Schwab’s new fund -- its 14th exchange-traded fund overall -- tracks the Barclays Capital U.S. Aggregate Bond Index. The company is touting it as a way to gain low-cost, single-investment exposure to four major sectors of the investment grade, taxable U.S. bond market: Treasuries, government agencies, corporate and securitized bonds.
The ETF “doesn’t really break any new ground,” says Timothy Strauts, ETF analyst with Morningstar, Inc. “There are already three ETFs that follow the same index.”
Schwab is offering the ETF at a competitive fee -- just 10 basis points, lower even than the 11 basis points Vanguard charges for its version. A larger advantage that Schwab has lies in the fact that clients on its platform will be able to buy the ETF without commissions -- as is the case with all the company’s proprietary ETFs.
Vinay Munikoti, CEO of investment advisor System Research, LLC, in White Plains, N.Y., said he expects Schwab’s U.S. Aggregate Bond ETF will face stiff competition from better-established rivals that enjoy small bid-ask spreads.
“However, new competition is always good, and if the Schwab ETF grows and shows good liquidity, active money managers such as myself would see no problem trading it,” he adds. “We look for sufficient volume and liquidity.
Perhaps not surprisingly, skeptics of ETFs include managers of active bond funds. Scott Carmack, portfolio manager at Leader Capital Corp., in Portland, Ore., suggests that investors compare the ETFs that track Barclays’ bond index with mutual funds that track it.
“Do a little legwork and look at some of the mutual funds out there and the outperformance they’ve had over the underlying index,” he said. “And remember, we have to quote our performance net of fees.”
The iShares Barclays Aggregate Bond ETF, a rival of Schwab’s new ETF, has returned 2.36% year to date. Meanwhile, investor-class shares of Leader Capital’s Total Return Fund have climbed 5.45% year to date.
Schwab says its U.S. Aggregate Bond ETF has the lowest operating expense ratio among ETFs in the Morningstar Intermediate Term Bond category.
The index the fund tracks is widely used as a benchmark for bond investors. It tracks the performance of the taxable, investment grade U.S. bond market, including Treasuries, government-related and corporate bonds, mortgage pass-through securities, commercial mortgage-backed securities and asset-backed securities that are publicly available for sale in the United States.
Schwab boasts $124 billion in retail ETF assets custodied on its platform as of June 30, 2011. U.S. fixed income ETF assets at Schwab increased by 11.5% in the second quarter, according to the company.