Category Archives: Charles Schwab

Schwab Survey Shows Which Generation Has Taken to ETFs the Most?

Investors’ knowledge and use of exchange traded funds nearly doubled over the past five years, and 42% expect ETFs to become their primary investment vehicle in the future, according to Charles Schwab’s 2017 ETF Investor Study.

The seventh annual study interviewed 1,264 investors in June between the ages of 25 and 75. They needed to have purchased an ETF in the last two years and have at least $25,000 in investable assets.

Eight percent of the investors said their portfolios already consist of only ETFs and 43% would consider holding only ETFs instead of individual securities.

The millennials generation has taken to ETFs the most — 56% of them say they’re their investment vehicle of choice. Among the members of Generation X, 44% said ETFs were their favorite vehicle; for baby boomers it was 30%; and for matures, those older than baby boomers, it was 23%.

Of millennials, 60% expect ETFs to be their primary investment vehicle in the future. That drops to 45% among Generation X, 23% among baby boomers and 17% for matures.

At least some financial advisors are scratching their heads over the survey results.  “I haven’t found that to be the case,” said Robert Karn, president of Karn Couzens & Associates, a registered investment advisor in Farmington, Conn. “Many of our clients have heard about ETFs, but they don’t know what they do. I don’t see millennials leading the charge. I don’t see in my practice what they’re saying in the survey.”

A low expense ratio is the most important factor in choosing an ETF, according to 62% of the respondents. Total cost was second, followed by, in declining order, the ETF provider’s reputation; how well it tracks its index; its historical returns; its liquidity/trading volume; if it’s commission-free; its exposure to a specific part of the market; its Morningstar rating; and finally, its total assets.

Investors are placing increased importance on the ability to trade ETFs without commissions. This year 55% said working with a brokerage that offered commission-free ETFs was very or most important, up from 38% in the 2012 survey.

Only 1 in 10 currently invest in socially responsible investments (SRI), 55% say they’ve heard about SRI and 35% don’t even know what SRI is. However, interest in SRI is growing. About 51% of the respondents said they would invest in SRI strategies if more education on products or asset allocation were provided.

Still, almost half of the ETF investors said it was important to them to invest in funds that align with their beliefs, 30% said they would actively seek out socially responsible funds and 42% preferred a strategy that was tailored to their values. About 53% said they had a “pretty good understanding” of how socially responsible their investments are and 46% said it was important to invest in socially responsible funds because they want their investments to align with their beliefs.

Interest in SRI investing is highest among millennials at 48%. Only 32% of Gen X investors seek out SRI strategies. That drops to 14% for baby boomers and 9% for matures.

“It surprised me how it reinforced my understanding of the demographic tilt toward ETFs,” said Steven Schoenfeld, founder and chief investment officer at BlueStar Indexes, which provides the benchmarks for the VanEck Vectors Israel ETF (ISRA) and the ETF Managers Trust BlueStar TA-BIGITech Israel Technology ETF (ITEQ). “It shows the appeal when people see they can do almost as well, if not as well, by aligning their values. It just makes them feel better and might make them better investors if their connection is more than just better returns. Then when the market gets volatile they might stick with it.”

With smart beta, 29% of the respondents said they currently invest in smart beta strategies and 59% said they planned to increase their investments in smart beta in the next year. About two-thirds of ETF investors have reduced active exposures over the last three years and replaced them with smart beta exposures.

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WisdomTree Wins ETF of Year at ETF.com Awards As ProShares Walks Away With 4 Statues

It’s award time again.

Much like Spring follows Winter, although reports of more snow this weekend are leading some to question that, the ETF industry starts its period of self-congratulations on the heels of the Oscars, Grammys and Golden Globes.

ETF.com, the self-proclaimed world’s leading authority on exchange-traded funds, started the season off with their second annual awards banquet.

“Our awards try to recognize the products that make a difference to investors,” said Matt Hougan, president of ETF.com. “The ones finding new areas to put money to work.” The awards are determined by a panel of experts chosen by ETF.com.

Held at The Lighthouse restaurant at New York’s Chelsea Piers March 19, ETF.com wins the prize for best party location. With picture windows overlooking the Hudson River, guests of the cocktail hour took in the sunset over New Jersey before the ceremony started.

The WisdomTree Europe Hedged Equity (HEDJ) was the big winner, grabbing the prize for ETF of the Year, while the Market Vectors ChinaAMC China Bond (CBON) won Best New ETF. Not quite sure what the difference is between those two awards, but obviously both funds stand out from the crowd of 117 ETFs issued in 2014.

However, ProShares swept the evening, as the single provider that won the most awards. The twin funds ProShares CDS North American HY Credit (TYTE) and CDS Short North American HY Credit (WYDE) claimed the awards for both Most Innovative New ETF and Best New Fixed-Income ETF.

“We designed these ETFs for investors who want high yield credit exposure that is isolated from interest rate risk,” said Steve Cohen, ProShares managing director.

The fund was also nominated for Best Ticker of the Year with its homophones for “tight” and “wide”. However, the awards announcer had a chuckle by claiming they really were pronounced “tighty whitey”, a reference to his jockey shorts. Best Ticker was awarded to HACK, the PureFunds ISE Cyber Security ETF.

ProShares also won Best New Alternative ETF for the ProShares Morningstar Alternative Solution (ALTS) and Most Innovative ETF Issuer of the Year.

“We are always striving to deliver new and innovative products to allow investors to build better portfolios,” said ProShares Chief Executive Michael Sapir.

Lee Kranefuss, the man who created the iShares brand of ETFs and built them into the largest ETF issuer in the world won the 2014 Lifetime Achievement Award.

In the only speech of the night — thank goodness — Kranefuss said, “ETFs allow people to take control.” He likened ETFs to iTunes, saying “no longer are you limited to what the record company puts out.” He said he’s often been asked if he thought the ETF industry would take off like it has in the 15 years since iShares launched.

“Not really,” said Kranefuss, “we just put out the best products we could put out.”

The other award winners:

Best New U.S. Equity ETF – iShares Core Dividend Growth (DGRO)
Best New International/Global Equity ETF – Deutsche X-trackers Harvest MSCI All China Equity (CN)
Best New Commodity ETF – AdvisorShares Gartman Gold/Euro (GEUR) and AdvisorShares Gartman Gold/Yen (GYEN).
Best New Asset Allocation ETF – Global X /JPMorgan Efficiente (EFFE)
ETF Issuer of the Year – First Trust
New ETF Issuer of the Year – Reality Shares
Index Provider of the Year – MSCI
Index of the Year – Bloomberg Dollar Index
Best Online Broker for ETF-Focused Investors – TD Ameritrade
Best ETF Offering for RIAs – Charles Schwab
Best ETF Issuer Website – BlackRock

Equity and Bond ETF Inflow Plays Tag With the Stock Market

With the S&P 500 index posting a 32% gain in 2013, it’s not surprising that exchange traded funds (ETFs) holding U.S. equities, especially large-capitalization stocks, received the biggest net cash inflow last year.

But with U.S. stocks falling in January, 2014 has seen ETF investors fleeing U.S. stocks and buying such categories as bonds and emerging-market stocks. Amid all this activity, equity ETFs tied to nonmarket-cap-weighted indexes have bulked up.

Despite the stock market rally in 2013, net issuance, or net cash inflow, into ETFs fell 3% to $179.87 billion as investors pulled money out of bond funds, according to the Investment Company Institute. In 2012, fixed-income ETFs posted record annual net inflow of $52.32 billion. But net inflow plunged 77% last year to $12.20 billion as fears grew that the Federal Reserve Bank will soon reverse its quantitative-easing strategy and allow interest rates to rise. Bond prices fall when interest rates rise.
When Federal Reserve Chairwoman Janet Yellen speaks and the markets move, huge sums of money flow between stock and bond ETFs. AP

When Federal Reserve Chairwoman Janet Yellen speaks and the markets move, huge sums of money flow between stock and bond ETFs. AP View Enlarged Image

“One consistent trend for a while is investors have been repositioning their portfolio for the rising rate environment,” said Michael Iachini, managing director of ETF Research at the Charles Schwab Investment Advisory. “They’ve moved out of Treasuries and are investing in short-term debt instruments from high-yield issuers.”

Equity inflow in 2013 grew 26% to $166.84 billion. Of that total, 62% of inflow, or $104.03 billion, went into ETFs holding domestic equities. The rest went into international funds. But that trend reversed in the first two months of 2014.

Broad-based U.S. equity ETFs recorded net outflow of $21.08 billion. SPDR S&P 500 ETF (SPY), which received the most inflow last year, $16.32 billion, posted net outflow of $19.00 billion in Q1 2014, according to BlackRock, which offers iShares ETFs and tracks industry statistics. More surprising was that bond ETFs saw net inflow of $17.64 billion, more than all of last year combined.

“One thing that happened in the beginning of January was that long-term interest rates came down and stabilized,” said ICI senior economist Shelly Antoniewicz. “It turned out the resolution on the debt ceiling wasn’t going to be an issue and people became more comfortable with the Fed’s policy of reducing the bond buying program.”

One of the biggest reversals in asset flow has been in emerging-market stocks. In 2013, ETPs (exchange traded products) holding emerging-market stocks posted net outflow of $10.92 billion, according to ICI. Things really picked up steam this year. In the first two months of 2014, emerging-market ETPs recorded net outflow of $12.58 billion.

For the full story go to Investor’s Business Daily.

Capital Gains Need to be Focus Before Year End

With the Bush tax cuts on capital gains and dividends due to expire December 31, ETF investors need to evaluate what tax moves to make before the year ends, says the ETF Team at Charles Schwab.

“ETF investors need to focus on capital gains,” Michael Iachini, the managing director of ETF Research at Charles Schwab Investment Advisory during a conference call. Because that tax rate on capital gains may rise next year, “If you have ETFs that you’ve owned for many years, especially since the bottom of market from 2009, you may have big gains. If you have large unrealized capital gains you may want to take them in 2012.”

While ETFs have a reputation for being tax efficient, that efficiency relates to the securities within the fund. Mutual funds incur capital gains every time the fund sells securities for a profit inside the fund. While ETFs can realize capital gains, they rarely do, especially in equity ETFs, because of how the ETF is structured. However, individual investors still incur capital gains in their personal portfolio accounts anytime they sell a mutual fund or ETF for a profit.

Another strategy investors use to lower their capital gains taxes is to sell other investments at a loss. This is called tax-loss harvesting because investors can offset capital gains with a similar loss of capital.  However, a big concern with tax-loss harvesting is investors need to avoid the wash sales rule. If you sell a security for a taxable loss and you buy a substantially identical security to the one you sold within 30 days it’s called a wash sale and you don’t get to count the loss.

“The most important thing clients need to be aware of is that not all ETFs are tax efficient,” said Eric Pollackov, Schwab’s managing director of ETFs.  “There are many ETFs that don’t allow the in-kind redemption process [where shares are traded for other shares] and they have to use cash.” These exchange-traded products track commodities and currencies and often hold futures contracts or physical commodities.”

Pollackov said Schwab has yet to pay capital gains in any of our ETFs since their inception. “This shows the skill of our team,” he said. “We try our best to have each ETF track its underlying index, but also make sure that it isn’t paying capital gains at the end of the year.” Schwab ETFs hold only equities and bonds. None hold commodities, futures or currencies.

Pollackov also noted that Schwab’s original eight ETFs hit a milestone recently by passing their third birthday. This is significant because most investors and advisors refuse to look at a fund before it has a three-year track record. This period of time give investors a good idea how a fund and its manager perform in a variety of markets circumstances. Not only does the third birthday show the products are well established and are probably here to stay, but many rating agencies, such as Morningstar, won’t rate a fund until it’s three years old.

He also suggested investors check out Schwab’s new educational research website at www.schwabetfeducationexchange.com/charlesschwab/

Golden Crossover Index Slices Equity Allocation

Dow Jones Indexes announced on Wednesday that its Dow Jones Golden Crossover U.S. Large-Cap Total Stock Market Index was going to slice its equity allocation from 100% to 25% over the next five days. The remaining 75% of the portfolio would be held in short-term U.S. Treasury Bills, which is pretty close to cash.

Using a quantitative and rules-based algorithm, the index has signaled a downward-trending market condition called a “Dead Cross.” The Dead Cross occurs when the market’s 50-day moving average crosses below its 200-day moving average. In short, a very bad sign for investors.

Known as the “Moving Average Crossover System”, the index’s quantitative strategy dynamically changes component weights between an underlying equity index and a cash index according to the occurrence of “Golden Cross” and “Dead Cross” signals. A Golden Cross occurs when the 50-day moving average crosses above the 200-day moving average. During this period, the index tracks the underlying equity index, in this case the Dow Jones U.S. Large-Cap Total Stock Market Index. During Dead Cross periods, the index is allocated between the underlying equity index and a cash equivalent.

While no ETF tracks the Golden Crossover index, two ETFs track the Dow Jones U.S. Large-Cap Total Stock Market Index: the Schwab U.S. Large Cap ETF (SCHX) and the SPDR Dow Jones Large Cap ETF (ELR).

Dow Jones Indexes says from December 31, 1999 through June 30, 2011, the Golden Crossover index outperformed the Dow Jones U.S. Large-Cap Total Stocks Market Index by 4.44 percentage points and reduced volatility by 5.97 percentage points, measured on an annualized basis.

The Dead Cross occurred in mid August. John Nyaradi says in addition to this, the market entered another rare bear territory indicator on the “point and figure” methodology used by Charles Dow himself. He says a dead cat bounce is a possibility, which is what we appear to be in right now, but that the major trend is negative. He recommends inverse ETFs.

If You Can’t Beat ‘Em, Join Em

If you can’t beat ’em, join em.

The word Vanguard describes the person or entity at the forefront in any movement, field, or activity. While the Vanguard Group mutual fund company led the charge into index funds for retail investors, it hasn’t been able to take that position in the ETF field.

On Tuesday, Vanguard announced it would sell its entire line-up of ETFs commission-free to its brokerage clients. This comes on the heels of Charles Schwab and iShares offering commission-free ETFs. However, by offering all 46 of its ETFs, Vanguard now offers the largest selection of funds without commissions. Vanguard also lowered the fees to trade stocks and non-Vanguard ETFs to the range of $2 to $7.

Three months ago, iShares offered to sell 25 of its ETFs on a commission-free basis on the Fidelity Investments platform. This came in response to Schwab’s move to offer free ETF trades on its Web site when it launched its first ETFs in November.

Since ETFs trade on stock exchanges, they must be bought through brokers. Hence, investors must pay commissions. These commissions have been one reason standing in the way of investors using ETFs in a dollar-cost averaging investment strategy. Because of this many no-load mutual funds have been able to withstand competition from ETFs. Even with just $10 trades, this comes out to a 10% on a monthly dollar-cost averaging investment of $100. By removing commissions, these firms are taking direct aim at the no-load mutual fund business.

Already, Vanguard posted significant growth in its ETF division. It’s the third-largest ETF company in terms of assets with $108.8 billion at the end of April, more than double the $50.7 billion in the year-ago month. Year-to-date, Vanguard has seen the most net cash inflows in the industry, $11.7 billion, according to Bloomberg.

Vanguard ETF’s offer some of the lowest expense ratios in the ETF industry, with an average of just 0.18%, compared with the industry average of 0.52% according to Lipper. With the addition of commission-free trades, Vanguard could see its growth rate increase even further.

Its top selling ETFs are the $24 billion Vanguard Emerging Markets ETF (VWO), the $15 billion Vanguard Total Stock Market ETF (VTI), and the $7 billion Vanguard Total Bond Market ETF (BND), according to Bloomberg.

For more commentary see:

The Wall Street Journal

Investment News

ETF Trends

Index Universe

Schwab Picks State Street to be Custodian

Charles Schwab appointed State Street to service its newly launched family of eight exchange-traded funds with custody, fund accounting, fund administration and transfer agency services. State Street has provided Schwab with these and and securities-lending services since 2005.

The custodian plays an important part in the creation of ETF shares because its the bank that actually holds the securities in the fund’s portfolio. Each night, the custody bank posts the fund’s actual portfolio and provides the stock to be bought and sold.

State Street, together with the American Stock Exchange, created in 1993 the first ETF, the Standard & Poor’s Depositary Receipts, or SPDRs (SPY). The Boston custody bank manages a family of ETFs under the SPDR name. It provides custody and administration for more than $18.8 trillion in assets and remains the custodian of the SPDR.