Schwab is shaking up its ETF lineup.
The company announced Thursday that on Aug. 15, Schwab Investment Management would be launching six new ETFs, weighted by fundamental factors instead of traditional market capitalization.
The new ETFs are based on the Russell Fundamental Index Series, developed by Russell Investments and Rob Arnotts Research Affiliates. The products will join Schwabs existing stable of 15 proprietary ETFs and be available to advisors and individual investors without trading commissions via the companys OneSource platform.
The six products are:
- Schwab Fundamental U.S. Broad Market Index ETF (FNDB, expense ratio: 0.32%)
- Schwab Fundamental U.S. Large Company Index ETF (FNDX, 0.32%)
- Schwab Fundamental U.S. Small Company Index ETF (FNDA, 0.32%)
- Schwab Fundamental International Large Company Index ETF (FNDF, 0.32%)
- Schwab Fundamental International Small Company Index ETF (FNDC, 0.46%)
- Schwab Fundamental Emerging Markets Large Company Index ETF (FNDE, 0.46%)
Rather than weighting companies by market capitalization, the Russell Fundamental Indexes weight companies on adjusted sales (a companys leverage is taken into account), operating cash flow, and dividends plus buybacks. In a presentation Thursday announcing the new products, Arnott said the methodology breaks the link between the price of a company and its weight in the portfolio.
Its not the first time Arnott has broken that link in an ETF product. Starting in late 2005, PowerShares began marketing a series of ETFs based on fundamental weightings tracking the FTSE RAFI indexes, also using methodology developed by Research Affiliates. But the FTSE RAFI indexes weight the portfolios slightly differently, using book value, cash flow, sales and dividends.
Asked about the differences between his two index series, Arnott explained that the new benchmarks have less of a deep value tilt and that annual performance figures will differ. In the very long run, historically, their performance is essentially identical, he added.
That could give a modest edge to Schwab as it markets the new ETFs to advisors, since the expense ratios of its new products are slightly lower than those of the similar PowerShares ETFs.
Those lower expense ratios are a step in the right direction, said financial advisor Jennifer Cole, of Sandia Park, N.M. Cole uses some ETFs that employ alternative weighting methodology in her practice, but said she is reserving judgment on the new ETFs.
Schwabs research indicates that 59% of its RIA clients currently use fundamentally weighted products, and about one in five plan to invest more in them in the near term. We believe fundamental strategies serve as a valuable compliment to market-cap and active strategies, said Anthony Davidow of the Schwab Center for Financial Research.
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