Schwab's attack of the clones

Five of firm's six new fundamentally weighted ETFs mimic existing funds
NOV 01, 2013
Charles Schwab Investment Management plans to launch six fundamentally weighted exchange-traded funds next week, five of which are clones of existing index mutual funds that use methodology created by Rob Arnott, chairman and chief executive of Research Affiliates LLC. Fundamentally weighted indexes weight stocks based on measures such as earnings, cash flow and book value, rather than market-capitalization-like traditional indexes. The Schwab Fundamental ETFs will offer advisers exposure to U.S. large-caps, small-caps and the total U.S. market, as well as international large- and small-caps, and emerging-markets large-caps. Except for the total U.S. market ETF, all the strategies are already available in a mutual fund from Schwab. The ETFs will be slightly cheaper than their mutual fund counterparts. The Schwab Fundamental U.S. Large Company Index ETF (FNDX) will charge 32 basis points, compared with 35 basis points for the Schwab Fundamental U.S. Large Company Index Mutual Fund (SFLNX). The ETFs will be cheaper than similar products, such as the $2.2 billion PowerShares FTSE RAFI 1000 ETF (PRF), which has an expense ratio of 39 basis points. Schwab's ETFs will also be available commission-free to the firm's clients. The popularity of fundamentally weighted ETFs with the firm's registered investment adviser clients played a big role in the funds' development, said Marie Chandoha, president of Charles Schwab Investment Management. Already, 59% of Schwab's RIA clients invest in at least one fundamentally weighted ETF, and one out of five intends to invest more in fundamentally weighted ETFs. It isn't hard to see the allure of fundamental strategies. Historically, they have performed well compared with a traditionally weighted index. The Schwab Fundamental U.S. Large Company Fund, for example, has five-year annualized returns of 11.4%, trumping the S&P 500's 8.3% return over the same period. Fundamental weighting doesn't always come out on top, though. The Schwab Fundamental U.S. Large Company Fund trailed the S&P 500 in both 2008 and 2011.

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