Schwab goes off script with crypto ETF filing

The index-based strategy, which has been described as 'baby steps' into the crypto space, will not offer direct exposure to digital currencies.

Charles Schwab Corp. became the latest major financial services brand to join the cryptocurrency game with a Securities and Exchange Commission filing to launch an index-based crypto ETF.

The filing for an exchange-traded fund, which is pending regulatory approval, was viewed as both inevitable and shocking by industry analysts, considering Schwab’s history of offering more conservative investment strategies.

“Given how meticulous Schwab has been with launching new products, this ETF filing is a bit eyebrow-raising,” said Nate Geraci, president of The ETF Store.

“Schwab’s ETF lineup is built around plain vanilla, core portfolio exposure, and they haven’t previously trafficked in thematic ETFs,” Geraci added. “It’s also surprising they decided to compete in this particular ETF category, which is already oversaturated, with way too many similar products on the market.”

According to the filing, the Schwab Crypto Economy ETF will track a Schwab Crypto Currency Index and will not invest directly in digital currencies, but in companies that develop or use cryptocurrencies and other digital assets or do work related to the blockchain.

The filing comes on the heels of similar filings by BlackRock and Fidelity in late January.

Todd Rosenbluth, director of mutual fund and ETF research at CFRA, said the Schwab filing stands out “because they have historically taken a more conservative approach with ETFs offering primarily broad market-based exposure and because they use their scale as an advantage to offer among the lowest-cost products in their investment style.”

“Thematic ETFs such as what was filed for tend to charge higher expense ratios, which could allow Schwab to take market share due to investor infatuation with fund fees,” Rosenbluth said.

Ric Edelman, founder of the Digital Assets Council of Financial Professionals, described Schwab’s filing as inevitable and “not at all surprising.”

“Eventually, every mutual fund and ETF sponsor will offer funds in this asset class,” Edelman said. “It is further evidence that crypto has gone mainstream. There is a huge amount of consumer and investor demand, and firms that fail to offer investments in this category will lose clients and AUM. Schwab’s move will force others to do likewise.”

Steve Larsen, president of Columbia Advisory Partners, has carved out a niche practice by bringing cryptocurrency strategies to his clients, and he describes the Schwab move as “baby steps” heading in the right direction.

“We all know that Schwab is an extremely conservative company, so this seems like a bold move for them, but this is still a safe index that will only invest in companies loosely related to blockchain technology,” he said.

Larsen compared the proposed Schwab ETF to gaining exposure to gold by investing in gold mining companies.

While Larsen favors allocating client assets more directly to the digital currencies, he said the existing futures-based cryptocurrency ETFs would be preferred over the kind of index exposure Schwab is planning.

As an example of the appetite for crypto-related investments, the futures-based ProShares Bitcoin Strategy ETF (BITO), which debuted in October, set a record by gathering more than $1 billion in its first two trading days, eclipsing a record set in 2004 when SPDR Gold Shares (GLD) reached the $1 billion mark in its first three days of trading.

“Anything that trades with a public ticker symbol will not be that involved in crypto,” Larsen said. “I would consider the futures-based ETFs significantly more directly related to crypto than the Schwab ETF, which is more of a baby step to introduce people to crypto.”

A Schwab spokesperson, confirmed the filing but declined to comment for this story due to a “regulatory-mandated quiet period.”