ETF Recipe: Core Exposure, Low Cost

Marie Chandoha is president and chief executive officer of Charles Schwab Investment Management (CSIM), overseeing hundreds of billions of dollars in assets invested across a wide range of products, including ETFs. Here she shares some of the trends she’s seeing in passive investing, including growing client appetite for core strategies, and the opportunity to innovate by simplifying things.

ETF.com: You oversee more than $300 billion in mutual funds and ETFs as head of Charles Schwab Investment Management. What's uniquely challenging about managing this many assets, and so much of it in passive strategies?

Marie Chandoha: A lot of the focus is on delivering consistent, repeatable performance with the right people, the right systems, the right technology and the right client communication. But it starts with what your strategy is as a business.

Our focus at CSIM is to deliver foundational strategies for our clients—really thinking about the core ETFs and index products that would be at the core of someone's portfolio. We start with that strategy and then build our business around what that strategy is.

ETF.com: In the ETF space, we've seen a lot of demand in recent months for core-type, vanilla passive strategies despite all the hype over smart beta. Are investors revisiting what core should look like? What trends are you seeing?
Chandoha: We’ve definitely seen a lot of growth in the core strategies, and that's driven by a number of things. One is, the fiduciary rule has stimulated a lot of intermediaries to think about how they deliver their services to clients, and more intermediaries are creating more model portfolios. Core ETFs and index products are great ingredients into those types of products.

Secondly, we've seen growth of things like robo advisors, where, again, those kinds of core strategies are great ingredients.

That, along with the fact that these core strategies are low cost—and clients, over and over again, are looking for low-cost strategies—are big drivers of where we're seeing growth.

We’re seeing growth in smart-beta strategies, but the predominant growth area is in the more basic sleeves into a portfolio.

ETF.com: When it comes to vanilla, core index ETFs, a lot of funds are very similar. How do you differentiate in that space?

Chandoha: When clients look at different products, they're looking at a number of different things. Price is one component. Another component is the firm and the investment process behind it, making sure the process is generating very close tracking versus the benchmark. Another aspect is the bid/ask spreads on those products—are they tight? What's the process behind how those products trade in the marketplace?

ETF.com: Any interesting trends you're seeing on how people are using Schwab strategies, or solving for investment challenges?

Chandoha: It's interesting; cost has been a big driver of growth, whether it's in index products or in active strategies in the mutual fund space. We see that as an important area.

In the core space, a lot of that price reduction has played out quite a bit, and it'll be interesting to see whether that continues to play out in other aspects of the market. That’s probably going to be the next wave of seeing more price competitiveness in other parts of the market. And that's not the place we play in, but I think that will be an interesting area to watch.

ETF.com: When it comes to ETF fees, will this race to the bottom eventually lead to zero?

Chandoha: It's frequently talked about as a race to the bottom, but when I think about our strategy and where we started our business, it really came from what was important to clients.

Every survey we do with our clients shows that price matters, and it’s close to the top. So we built our business and our strategy trying to deliver our products at as low a cost as possible. That means making sure we have great operational efficiency, and building to scale to make sure we can deliver that real low pricing.

Firms that have scale can deliver lower pricing. Increasingly, over time, scale is going to become even more important to translate those benefits to lower cost for clients, whether it's in core products, other types of ETF strategies or in mutual funds.

ETF.com: Where do you see space for innovation, whether it’s in products or new ways of reaching clients?

Chandoha: When it comes to actual products, we have too many out there. Simplicity is the new innovation. When we think about our product set, we look for the products that will be most used and most valuable to our clients. We only have 22 ETFs, yet we're the fifth-largest provider in the industry. I'd rather have fewer products that clients really want than have too many products.

Where I see the biggest innovation is in terms of how we serve our clients. I’m excited about technology that's coming on in terms of how we can better communicate with our clients, how we can know our clients better, how we can observe our clients better. New technology is going to help improve what we offer our clients.

Focusing on what's most valuable and serving it up in a way that’s consumable and easy to understand, and on demand is where innovation really needs to go; it's not about product proliferation.

Contact Cinthia Murphy at [email protected]