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Schwab to launch more fixed income ETFs

Schwab Asset Management has recently announced the launch of a Municipal Bond ETF (NYSE Arca: SCMB), its eighth bond ETF and the 29th Schwab ETF overall.

D.J. Tierney, senior investment portfolio strategist at Schwab Asset Management, explains that he has a particular passion for bonds, having spent some 20 years in the bond market and has been witness to the growing acceptance of fixed income ETFs.

Schwab was relatively late to launching ETFs, with its first launch in 2009. “But we have had a pretty impressive 13 years since then,” Tierney says, growing to be the fifth largest provider in the US, and the third largest in terms of inflows.

“Our formula is resonating with a lot of investors and advisers out there,” Tierney says. “We have a relatively modest line-up with 28 ETFs while other top firms have over 100 ETFs or even 200 ETFs, so we have taken a different approach with a disciplined line-up that emphasises low cost and liquidity.”

Schwab’s broker dealer business goes back to the 1970s but its asset management business started in the early 1990s. One of the first products was the Schwab 1000 index mutual fund

“At the time, the team thought it was a good way to deliver low-cost investment exposure,” Tierney says.

Schwab is the third largest provider of indexed mutual funds in the US and Tierney says that the firm’s scale and technology enables them to compete at the low-cost end of the spectrum.

“We are agnostic as to the value of offering index mutual funds or ETFs, and in the retirement space, the tax efficiency of ETFs doesn’t come into play – we believe there still are plenty of spaces for both,” Tierney says.

“Where we have the same asset classes in mutual funds and ETFs, we charge the same expense ratio. For example, the Schwab 1000 Index Mutual Fund and the Schwab 1000 ETF are five bps each.”

The latest muni bond ETF offers access to a market that Tierney believes investors find difficult to access.

“If you ask the average investor, they are more comfortable with stocks than buying municipal bonds – they wouldn’t know where to start and would be dumbfounded so ETFs can simplify the experience and give them easy access at a low cost.”

Tierney believes that ETFs have only just started to penetrate the market in bonds. “We are excited to enter that space with the lowest cost muni product on the market,” he says.

The firm has not been an active issuer of ETFs, with a six-year stretch where it  launched just one ETF, but the firm launched its first thematic and crypto-related ETF in July and launched its first actively managed ESG ETF last November.

“You will see more coming from us in the fixed income space,” Tierney says. “And the other theme is that we think there is more room to offer personalisation when it comes to investing – offering funds that resonate with peoples’ beliefs and aspirations.”

Hence the crypto ETF, investing in the equities of companies that are involved in the cryptocurrency digital asset business, which has seen some inflows, he says. “It’s not an easy market to bring new products to market but we are excited about its future as we heard from our investors that there is so much interest in the space and our product charges 30 bps, half the cost of others.”

Tierney notes the growth in ETF assets and interest in ETFs. “It shows the interest and momentum behind them, and that has dwarfed that of the index mutual funds in terms of dollar volumes into the space – the asset growth has been breathtaking for the industry.”

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