By most accounts, Charles Schwab’s venture into the ETF industry has been an extremely successful one. After launching its first fund in late 2009, the firm has subsequently rolled out seven additional equity ETFs offering exposure to all corners of the domestic and international equity markets. At the end of July, Schwab ETFs had $1.4 billion in assets, up more than 300% from the end of last year.
Now Schwab is wading into the fixed income ETF waters, announcing today the launch of three bond funds:
- U.S. TIPS ETF (SCHP): This ETF will track the performance of the Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L), a benchmark comprised of publicly-issued Treasury inflation-protected securities with at least one year remaining until maturity. That’s the same benchmark tracked by TIP, the ultra-popular iShares fund with more than $20 billion in assets.
- Short-Term U.S. Treasury ETF (SCHO): This ETF offers exposure to Treasuries at the short end of the maturity curve, seeking to replicate the Barclays Capital U.S. 1-3 Year Treasury Bond Index. Again, this index is already linked to an existing iShares ETF; SHY tracks the same benchmark.
- Intermediate-Term U.S. Treasury ETF (SCHR): This ETF seeks to replicate the Barclays Capital U.S. 3-10 Year Treasury Bond Index, providing exposure to Treasuries with intermediate maturities. The closest direct competitor to this fund will come from Vanguard; VGIT also tracks an index comprised of Treasuries with maturities between three and ten years.
Schwab is entering into bond ETFs at a pivotal time; this asset class has accounted for nearly half of all ETF cash inflows through the first seven months of 2009 (approximately $23 billion). And as markets continue to exhibit significant volatility, interest in fixed income products continues to grow. “There is growing demand from investors, traders and advisors for ETFs at a low cost,” said Peter Crawford, senior vice president at Schwab. “Fixed Income ETFs are the fastest growing segment of the ETF market. We see tremendous potential for their continued growth” [see also Beyond LQD: Exploring Corporate Bond ETF Options].
Low Cost Alternatives
Schwab has built a reputation as a low-cost provider of financial services, and its most recent products are certainly consistent with that mantra. SCHP will charge an expense ratio of 14 basis points, cheaper than the otherwise similar TIP (which charges 0.20%). Likewise, SCHO will charge a lower expense ratio than its closest competitor; the new Schwab fund’s fees total 0.12%, while SHY charges 0.15%. SCHR will also charge 0.12%, making it one of the cheapest fixed income ETFs available [see a list of 25 Cheapest U.S.-Listed ETFs].
Recent months have seen an escalation of price wars within the ETF industry. A number of issuers, including Schwab, Van Eck, and iShares have cut expense ratios on popular products, hoping to lure investors who gravitate towards low cost options [see Five Ways To Slash Your ETF Expenses]. Schwab’s new products will represent some of the cheapest bond ETFs available, perhaps putting pressure on existing ETF issuers to lower their fee structures.
Investors with a Schwab account will be able to trade the new ETFs commission free, peeling away another layer of costs that can eat into bottom line returns. Vanguard and iShares have also rolled out commission-free trading options in recent months (TIP is available commission-free through Fidelity; SHY is not).
Expect Schwab to build out its fixed income ETF lineup over the next year, likely rolling out products that cover other popular areas of the fixed income universe. For updates on all new ETFs, sign up for our free ETF newsletter.
Disclosure: No positions at time of writing.