Schwab’s ETF Gift Horse

September 22, 2014

 

There’s a reason the number for the non-Schwab funds has to be so high. Each of the issuers participating in the program is paying something to Schwab for the privilege. That’s how the regular-old mutual fund OneSource program has always worked.

However, since there are no fat 12(b)1 fees baked into ETFs, some sort of firm-level deal for product placement is most likely in place. And if you’re the issuer wading into Schwab, you’re not going to put your cheap products in, and then take a loss on every dollar.

When you combine the two razors that determine which funds get in and which funds don’t, you end up with some slightly odd lists. For example, in the latest barrage of PR, it was notable to see Pimco on the list. But if you look at the list of Pimco funds included, you may notice some absences.

Fund Ticker ER Average
Spread
Pimco 0-5 Year High Yield Corporate Bond HYS 0.55% 0.03%
Pimco Investment Grade Corporate Bond CORP 0.20% 0.13%
Pimco 25+ Year Zero Coupon U.S. Treasury ZROZ 0.15% 0.33%

 

 

 

 

There’s nothing wrong with these funds per se, but where are the really good ones, the ones people probably actually want from Pimco, like the Pimco Total Return ETF (BOND | B) or even the Pimco Enhanced Short Maturity Strategy (MINT | B)? The answer, I suspect, is that those two actively managed strategies would be seen as competing too directly with Schwab’s core bond ETFs. Ditto the very popular suite of Pimco TIPS ETFs.

Similarly, while SSgA is the biggest issuer in the group (no iShares or Vanguard ETFs here), and has some 48 ETFs represented, the collection of ETFs is not what you might expect. You won’t find the SPDR S&P 500 (SPY | A-98) or the SPDR Gold Trust (GLD | A-100) or any of the Select Sector ETFs on the list, despite their enormous popularity.

In fact, the largest ETF you’ll find from SSgA on the Schwab list is the SPDR Barclays Convertible Securities ETF (CWB | C), a fund that barely cracks the top 20 ETFs offered by SSgA by assets. And you’ll find products all the way down to the tiny, almost $3 million SPDR MFS Systematic Value Equity ETF (SYV | D-69).

Why? Because SYV has an expense ratio of 60 bps and has absolutely no chance of stealing assets from Schwab’s entry in the segment, the plain-vanilla Schwab U.S. Large-Cap Value ETF (SCHV | A-90).

 

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