Many Schwab ETFs Hit Key 3-Year Milestone

November 28, 2012


Why Three Years?

The three-year track record requirement seems to have become a mainstream notion among investment advisors because it’s only after a fund hits that milestone that it gets a Morningstar rating—a metric that many turn to when making investment decisions.

That time frame would also allow the fund to capture different parts of the business cycle, and give investors a clearer sense of how well the fund’s manager performs longer term, IndexUniverse’s ETF analyst Carolyn Hill said.

Still, Hill said that while the three-year history might be important for actively managed funds, it’s less relevant for passive funds that are expected to track a benchmark.

“Passive funds aren’t picking stocks or trying to beat the market, so you don’t need as long of a time frame to reliably evaluate them—you just need to figure out if they are consistently delivering the returns of their underlying indexes,” Hill said.

Investors Care About Other Factors Too

“Three years is important for active funds because that’s when they get a Morningstar rating,” Portfolio Solutions’ Rick Ferri agreed. “It’s far less important—almost meaningless—for plain-vanilla index funds and ETFs.”

“Much more important to investors is the amount of assets in the Schwab ETFs, trading spreads and trade volumes,” Ferri added.

From an asset-gathering perspective, Schwab has done remarkably well. Of the eight ETFs celebrating their third year, five of them have attracted more than $500 million in assets, and one of them has more than $1.1 billion.

It’s worth noting that of the more than 1,400 ETFs in the market today, only about 12 percent of them have managed to hit or break through the $1 billion mark, according to data compiled by IndexUniverse.

Schwab’s focus on low-cost offerings has also given it an edge over its competitors—Schwab ETFs are the cheapest in their respective segments—and that’s not to mention the commission-free trading offered to Schwab clients.

Robert Stein, global head of Chicago-based Astor Asset Management—a firm that builds ETF portfolios for advisors—argues that while focusing on the third-year milestone isn’t necessarily a metric everyone follows, it can be a relevant factor depending on the ETF.

“I think the three-year mark is somewhat arbitrary, but more relevant depending on what the ETF tracks,” Stein told IndexUniverse. “If the ETF tracks an index that has a longer track record, the three-year time horizon is less relevant, and I would consider other factors first.”

“For ETFs that depend on the manager or some rules-based investment approach, three years is a good benchmark,” he said.


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