2016: Big ETF Predictions

December 30, 2015

Big Predictions for 2016Schwab Headed For No. 3 Annual Inflows Spot

Charles Schwab has been something of a stealth bomber in the ETF space for the last several years. Launching its first funds back in 2009, the firm now has a lineup of more than 20 ETFs that cover core asset classes, including several smart-beta funds.

That’s certainly not a big fund lineup, but it’s all part of Schwab’s plan, which does not include country, leveraged or sector funds. “We are more in where we believe about two-thirds off the flows are going,” said John Sturiale, senior vice president of product management for Charles Schwab Investment Management.

Right now, Schwab has roughly $39 billion in assets under management in its own ETFs, ranking it the seventh-largest ETF issuer in terms of assets under management; it was also No. 5 in terms of inflows year-to-date as of Nov. 30.

Going forward, we expect flows to gather even more quickly for Schwab, primarily because of its low-cost funds, its vast distribution network and its OneSource platform.

The firm aims to be the low-cost leader in every asset class where it offers an ETF. For example, its Schwab U.S. Broad Market ETF (SCHB | A-100) recently saw its expense ratio trimmed to 3 basis points to match the iShares Core S&P Total U.S. Stock Market ETF (ITOT | A-100). It’s also 2 basis points cheaper than the Vanguard Total Stock Market ETF (VTI | A-100), which is offered by the firm that had been the low-cost leader before Schwab stole its crown.

Certainly, in its commitment to low costs and a limited list of building-block-style funds, Schwab has a lot in common with Vanguard—currently the No. 2 firm in terms of assets under management and year-to-date inflows—in its approach.

However, Schwab’s commission-free OneSource ETF program goes much farther than Vanguard’s, which only includes its own funds. Schwab’s program comprises more than 200 funds from 14 issuers, not just Schwab’s ETFs. That makes it the largest commission-free program currently available, and there’s no doubt it’s driving assets into Schwab funds.

Schwab’s distribution pipeline for its ETFs is also vast, including its retail arm and its advisor network of 7,000 RIAs. There’s also the relatively new Schwab Index Advantage 401(k) ETF platform, where Schwab’s and other firms’ ETFs are marketed to retirement plan consultants and employers. More recently, via its retail operations, Schwab has launched the Intelligent Portfolios robo-advisory service, which builds ETF portfolios for investors.

For all of these reasons, we believe that 2016 will see Charles Schwab move up the leader board to claim the No. 3 spot for ETF annual inflows, just under BlackRock’s iShares and Vanguard.

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