There are roughly 75 high-yield corporate bond exchange traded funds on the market today, including many from venerable issuers that registered investment advisors are familiar with.
That universe is about to get a little larger courtesy of one of the biggest ETF issuers as Charles Schwab is planning to roll out the Schwab High Yield Bond ETF (NYSE Arca: SCYB) on or about July 11. SCYB will be the ninth ETF in Schwab’s fixed income lineup and the first of the junk bond variety as the issuer’s bond ETF menu is currently comprised of investment-grade corporates, municipal bonds and Treasurys. The largest of that group is the $14.43 billion Schwab Short-Term U.S. Treasury ETF (SCHO).
“The goal of the Schwab High Yield Bond ETF is to track as closely as possible, before fees and expenses, the total return of the ICE BofA US Cash Pay High Yield Constrained Index,” according to a statement issued by Schwab. “More specifically, the ETF seeks to provide broad-based exposure to the U.S. high yield corporate bond market with a focus on liquidity, while attempting to mitigate investment risk through security selection and issuer diversification.”
All SCYB holdings will be dollar denominated.
SCYB Could Enjoy Advantages
One of the reasons new ETFs struggle to gain traction is that, due to assets under management requirements on advisor custody platforms, many rookie ETFs take ages to get onto those platforms, if they make it at all.
Usually, that’s not an issue for Schwab ETFs because, as advisors know, the firm is one of the largest providers of custodial services to advisors. It’s a big reason why despite a late entry into the industry, Schwab is now the fifth-largest domestic ETF sponsor. Of course, good timing helps new ETFs and that could be true of SCYB.
"The Schwab High Yield Bond ETF is a timely addition to our lineup of fixed income ETFs as investors continue to seek out low-cost, straightforward products that help diversify their portfolios," said Nicohl Bogan, Director of Product Strategy and Development, Schwab Asset Management, in the statement. "SCYB is a compelling offering for investors seeking potentially higher-yielding fixed income with the inherent benefits of an ETF, including tax efficiency and ease of trading."
How SCYB Can Separate Itself
One of the primary battles new ETFs face, regardless of issuer, when entering an established crowded field is how to separate themselves from entrenched rivals.
An easy way for issuers to accomplish that objective is by going low on fees, undercutting the established competition. Schwab is doing that with SCYB as the issuer said the new ETF’s expense ratio will be 0.10% per year, or $10 on a $10,000 investment. That puts SCYB in a tie with the SPDR Portfolio High Yield Bond ETF (SPHY) as the least expensive junk bond ETF.
Low fees aren’t a cure all when it comes to attracting assets in the ultra-competitive industry, but that plus the Schwab brand and distribution network do put the odds in SCYB’s favor.
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