That doesn’t mean iShares is rope-adoping and assuming its dominance will not face challenge or that its approach to bringing in assets does not need to change. But when you’re the size of iShares, you have to find prime-growth areas on which to focus to keep its numbers strong. Wiedman thinks he knows that answer to that one too. “Fixed income, fixed income, fixed income,” he said.
“As investors continue to grapple with low yields and volatile markets, a growing number are beginning to realize that the bond strategies of the past are just not behaving the way they used to.”
Wiedman believes global industry growth will be primarily driven by institutional and retail investors embracing passively managed fixed-income ETFs. “At iShares we like to call it a ‘quiet revolution,’” he said.
It’s not a bad bet—fixed incomefocused ETPs currently represent less than one-fifth of all ETP assets, despite the fact that in the non-ETF/ETP world, the bond market is about three times the size of the equities market. That is room for growth, Wiedman said, it’s not a new story for the firm, which created the first fixed income ETF nearly a decade ago.
“By offering price transparency at the ETF level and a liquidity layer that can exceed the underlying over-the-counter market, we may be creating a reference market of the future [in fixed-income ETPs],” Wiedman said.
Up & Comer: Charles Schwab
Schwab is also a player in lower-cost ETFs. In late September, Schwab cut its annual expense fees on its 15 ETFs, in some cases by as much as 60%. For example, the Schwab’s U.S. Mid-Cap ETF (SCHM) saw its fee cut in half, to 7 basis points from 13 basis point. With the lower fees, Schwab undercuts the competition. For example, its U.S. Large Cap Fund (SCHX) now charges 4 basis points compared to 10 basis points for the Vanguard Large Cap Fund (VV) and 9 basis points for SPDR’s S&P 500 ETF (SPY).
Schwab’s moves actually led a new round of expense cuts. Within weeks, both iShares and Vanguard followed suit with price-cutting initiatives of their own. John Sturiale, head of ETF product management at Schwab, explains that the beating heart at the core the firm’s cost-conscious strategy is its three-pronged distribution channel that serves customers that come in from its retail outlets, its online site, its affiliated registered investment advisers and 401(K) plans that offer its products.
Schwab’s distribution channel, which included 8.7 million active brokerage accounts and total client assets of $1.89 trillion at the end of the third quarter, allows the San Francisco-based brokerage to be aggressive when it comes to pricing and fees.
Schwab’s theory may well be proven right. At the end of the third quarter, ETF assets at Schwab reached $146 billion, up 35% over the past year and slightly above the level of ETF industry growth of 34%, according to research firm Strategic Insight.
Schwab’s ETF group is comprised of 12 to 15 product managers, client advisors and portfolio managers, which work with the indexed mutual funds too, as the indexing team. Sturiale said the firm added three or four new professionals in 2012, and plans to add more in 2013. “It’s a growing area for the firm,” he said.
Schwab’s strategy to compete on price has won over some industry experts “Do I think Schwab is someone to watch in the ETF space—absolutely,” said Daniel Weiskopf, co-portfolio manager atForefront Global ETFs.
The firm’s wide distribution, Sturiale said, allows Schwab to offer: (i) the lowest operating expense ratio in each respective Lipper category of ETFs; (ii) commission free trades; and (iii) an aggressive bid/ask spread that often offers further savings to investors. “All three of these factors allow Schwab to cut costs for customers,”
Sturiale explained. “And as you can tell, costs are important to us.”
But if the firm’s ETF growth is fed by lowering its expense ratios and offering free trading, what has the firm truly accomplished at the end of the round? Can it make a profit in ETFs?