To hear Sturiale tell it, plenty—in an environment that, in fact, may be the new normal, returns are being squeezed and thus, value and low-cost offerings takes on paramount importance, he said, adding that in this diminished-return paradigm, it may be easier to find 20 basis points of lower cost than it would to find a bump of 20 basis points of return.
“I think the general trend for prices is to go lower,” Sturiale said. ‘Investors are realizing that indexing is a commodity, and a cap-weighted, beta-indexed ETF needs to attract on cost. The question is, how low can it go?”
That lower-cost ETFs are potent weapons for Schwab is important because the firm may not be able to compete on sheer size or the number of ETFs offered—yet. “Schwab is certainly not the biggest in the ETF market, and we’re not going to be,” Sturiale explained. “Our value and our attraction is in finding lower costs for our clients. The cuts we made strengthened that position, and we’re going to stay competitive.”
Down, Not Out—Russell Investments
In mid-August, Russell Investments announced it would shutter its family of 25 passively-run ETFs. It looked as if the firm, which is a big supplier of the indexes that passive ETFs are based on, was throwing in the towel.
The move came little more than a year after Russell stepped into the ring. The funds had amassed only $310 million in assets, as of the end of July, and were wound down by October 24, with investors getting their money back.
ETF analysts and advisors speculated that it was this lack of asset accumulation that had doomed Russell’s fledgling effort. And Russell wasn’t alone—FocusShares, the ETF unit of brokerage firmScottrade, scrapped its 15 ETFs, just 18 months after launching them.
Russell said 30 employees in the ETF division were laid off, and Jim Polisson, CEO of Russell’s ETF business, left the firm to pursue other opportunities. Despite all this, few expect Russell to be gone for good. “I would call what Russell did a ‘tactical retreat’,” said Jim Pacetti, an ETF industry consultant with S*Network Global Indexes, a New York-based index provider. “They came out with a good product, but the firm’s timing was off—had the equity market rebounded, thenthe wind would have been at their backs and it would have been a different story.”
Some of the shuttered ETFs were relatively popular. For example, the Russell 1000 Low Volatility ETF (LVOL) and the Russell Equity Income (EQIN) were the firm’s most popular ETFs, amassing $69 million and $50 million before being closed.
Interestingly, Russell kept one of its ETFs in the group alive—the Russell Equity ETF (ONEF), which was the only actively managed ETF of the group. The Russell Equity ETF is benchmarked to the Russell Developed Large Cap Index, and has just $4.3 million in total assets.
Actively managed ETFs have garnered fewer assets and less respected than the cheaper passively managed ETFs, which often out-perform their actively managed counterparts, analysts said. At just under $5 million in assets, ONEF holds less than the industry standard for start-up seed money, though.
“The decision to liquidate the passivelymanaged ETFs was driven by a range of strategic factors, including to more fully reaffirm our focus on our core competency— delivering multi-asset solutions—and it frees us from needing to dedicate the attention and resources toward building distribution and scale for a stand-alone ETF business,” said Steve Claiborne, a Russell spokesman, in an email.
Obviously, Russell is a big name in the ETF industry in another way—indexing, a fact the firm is eager to underscore. “Russell serves as the underlying index provider for many passively-managed ETFs around the world, which have more than $80 billion in assets under management, and we aim to continue our strong partnership with each of these ETF sponsors.”
But can Russell parlay its ETF-indexing business, which represents just a fraction of its overall indexing business, into another foray of ETF creation and management? “I think Russell will be out of the market temporarily, say like a year or longer, and come back in when they see the opportunity,” S*Network’s Pacetti said.