Advisors that are fans of using exchange traded funds in client portfolios as well as those that custody with Charles Schwab know a few things about the firm’s footprint in the ETF arena.
First, Schwab was a relatively late entrant into the ETF space. Second, it was able to make up for lost time owing to strong brand recognition and a deep distribution network. Third, it’s one of the most adept competitors on costs, in some cases out “Vanguarding” Vanguard. Fourth, like Vanguard, Schwab’s overall ETF lineup is small, comprised of fewer than 30 funds today. And like Vanguard, Schwab is selective when it comes to bringing new ETFs to market.
Those aren’t negative factors at all. As of Jan. 24, Schwab has $274.57 billion in assets under management at its branded ETFs, making it the fifth-largest domestic ETF issuer. It’s got more than double the ETF assets as the number six issuers. All that despite the fact that Schwab is young in ETF issuer terms, having brought its first products to market in late 2009.
With all that in mind, advisors may want to keep an eye out for a new junk bond ETF from Schwab, due out sometime over the next several months.
SCYB Could Be Fee Game Changer
The Schwab High Yield Bond, as it is believed the product will be called, is expected to trade under the ticker “SCYB” and could arrive as soon as April. While the issuer has an extensive lineup of fixed income products, including investment-grade corporate bond ETFs, SCYB will be the issuers first high-yield corporate debt fund.
If history is any guide and it likely will be in this case, the new Schwab junk bond ETF will track a plain vanilla index and be far from exotic. In theory, that will make it difficult for the ETF to standout, but Schwab has the cure for that: Undercutting rivals on fees.
Though not yet publicly confirmed by the firm, there’s scuttlebutt in the ETF community that Schwab charge a mere 0.05% per year, or $5 on a $10,000 investment, on its upcoming high-yield bond ETF. That undercuts the SPDR® Portfolio High Yield Bond ETF (SPHY), which is currently the least expensive ETF in the category with an annual expense ratio of 0.10%.
The two next cheapest junk ETFs each charge 0.15% per year. It’s not a stretch to say the target audience for the new Schwab ETF, whenever it comes to market, will be advisors and buy-and-hold retail investors. While the fund is unlikely to rapidly threaten the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) or the SPDR Bloomberg High Yield Bond ETF (JNK), which are favorites of professional traders, it could be a credible threat to the $9.79 billion iShares Broad USD High Yield Corporate Bond ETF (USHY).
Timing Could Be on SCYB’s Side
Not all new ETFs have the benefit of good timing when they come to market, but it’s possible the Schwab high-yield product will be well-timed.
Of course, that’s predicated on default rates remaining low, the Federal Reserve laying off interest rate hikes and the economy not entering a material recession.
Even if all those scenarios come to pass, it’s not a stretch to say the combination of branding and a low fee will ultimately propel the Schwab junk bond ETF to success.
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