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The investment management division of brokerage giant Charles Schwab is set to roll out six new fundamentally weighted exchange-traded funds (ETFs). The funds, which will launch in the US next week, will be linked to the Russell Fundamental Index Series.
The series was created by applying Research Affiliates’ fundamental weighting methodology to the Russell 3000 and Russell Global ex-US indices.
Fundamentally weighted methodologies are often referred to as smart beta because they attempt to capture the beta of a fundamental strategy.
They do this by screening and weighting securities based on objective factors like adjusted sales, cash flow, and dividends/buybacks – principles borrowed from active management. By contrast, traditional market-cap indices weight securities based on market capitalisation, so the largest companies have the largest weight in the index.
Many argue that because traditional market-cap indices over-emphasise popular stocks and de-emphasise undervalued stocks, it can over-expose investors’ portfolios to market speculation, bubbles and fads. Smart beta methodologies break the link with price, and have historically delivered excess returns relative to the market-cap equivalent.
The new ETFs are as follows:
Schwab Fundamental US Broad Market Index ETF (FNDB)
Tracks the Russell Fundamental US Index. Expense ratio 0.32%
Schwab Fundamental US Large Company Index ETF (FNDX)
Tracks the Russell Fundamental US Large Company Index. Expense ratio 0.32%
Schwab Fundamental US Small Company Index ETF (FNDA)
Tracks Russell Fundamental US Small Company Index. Expense ratio 0.32%
Schwab Fundamental International Large Company Index ETF (FNDF)
Tracks the Russell Fundamental Developed ex-US Large Company Index. Expense ratio 0.32%
Schwab Fundamental International Small Company Index ETF (FNDC)
Tracks the Russell Fundamental Developed ex-US Small Company Index. Expense ratio 0.46%
Schwab Fundamental Emerging Markets Large Company Index ETF (FNDE)
Tracks the Russell Fundamental Emerging Markets Large Company Index. Expense ratio 0.46%
Marie Chandoha, president of Charles Schwab Investment Management, said: “These ETFs add a new flavour to our ‘pure vanilla’ ETF market-cap line-up and further demonstrate our commitment to offering core products that help investors build their portfolios and potentially achieve better outcomes. We’re pleased to be able to join with other industry leaders to offer these competitively priced, well-constructed ETFs and educate investors through plain-talk and tools.”
The launch comes at a time when interest in smart beta and fundamental indexing is gathering pace. According to the latest Independent Advisor Outlook Study by Schwab Advisor Services, 59% of registered investment advisors (RIAs) currently invest in fundamentally weighted products, and roughly one in five plan to invest more in the near term. Additionally, the research shows that 34% of RIAs believe fundamentally weighted products can serve as an effective complement to market-cap weighted and actively managed products.
“We’re here to help advisors and investors alike recognise that fundamental index funds – whether ETFs or mutual funds – are a thoughtful way to gain broad industry exposure, right alongside their market cap-weighted counterparts,” added Chandoha. “Fundamental index methodologies have become important to the institutional investing community, and we think it’s time all investors benefit from this approach.”
The new ETFs, which will sit alongside Schwab’s existing line-up and 15 ETFs, will be added to Schwab ETF OneSource – an ETF platform giving investors and advisors access to commission-free ETFs – on the first day of trading.
As of June 30, 2013, Charles Schwab had more than $167 billion in total ETF assets custodied on its platform and $12 billion in assets under management in Schwab ETFs.