ETF Expert Corner
David Botset Highlights Charles Schwab’s Low Cost Approach to Investing
February 14th, 2017 by ETF Store Staff
You can listen to our interview with David Botset by using the above media player or enjoy a full transcription of the interview below.
Nate Geraci: I'm now very pleased to welcome to the program David Botset, Vice President of Strategy and Product Development at Charles Schwab. Charles Schwab is currently the 5th largest ETF provider in the country with nearly 64 billion dollars in assets. They offer 21 ETFs, 15 that are market cap weighted, and then 6 fundamentally indexed ETFs. It wasn't long ago that Schwab wasn't even on the list of the top 10 ETF providers, but here we are today with Schwab at number five on the list. They're certainly one of the fastest growing ETF providers out there. David is joining us via phone today from San Francisco. David, great to have you on the program.
David Botset: I appreciate you giving me the time today. It's great to be on the program.
Nate Geraci: David - when we talk about Schwab ETFs, I think we have to start with cost, because Schwab offers some of the lowest cost ETFs in the market. As a matter of fact, if you go through many of the major broad asset classes, Schwab ETFs are actually the lowest cost. Why has cost been such a focus?
David Botset: You know, I think it's not just our ETFs, but for Schwab, it's in our DNA. As you may have seen earlier this month, Schwab announced that it's sharing our scale benefits with clients and leveling the playing field to make investing more equitable for all. At a high level, that announcement included lowering online equity trade commissions and introducing a satisfaction guarantee. At that time, we also lowered costs for index mutual funds and eliminated investment minimums, which we think is great news for investors. This means that everyone gets access to pricing that our competitors only reserve for the biggest investors. At Schwab, we believe everyone deserves the VIP treatment. Really, this is just a continuation of what you've seen us do with our ETFs since we've launched in 2009. At that time, we were the first to launch ETFs that traded commission free. We've continually cut expenses on our ETFs and broken through price floors since 2009. In fact, we've made over 28 price reductions over the life of our ETFs.
Nate Geraci: David, this focus on cost, do you feel like this is being driven by investors?
David Botset: Absolutely. You know, we did a survey recently. We surveyed a thousand investors, and clearly at the top of their list, by at least 70% of those investors, indicated that controlling costs were one of the key elements that they found in making wise investment decisions.
Nate Geraci: David, in our first segment, Conor and I talked about the latest surrounding the DOL fiduciary rule. I'm just curious, what role do you think just the talk surrounding the Department of Labor's fiduciary rule has had in generating investor awareness around fund cost?
David Botset: I think it's just accelerated the costs discussion for investors. I think this is a trend that we've really seen pick up speed with DOL, but it's not brand new. In fact, I think coming out of the most recent financial crisis, clients better understood that controlling costs was one of the things that they could do best within their portfolios. The discussion on DOL fiduciary rule accelerates that, and we think puts a brighter spotlight on the cost of investing.
Nate Geraci: I don't think there's any question that investors are much more aware of fund fees as a whole. They're certainly paying attention to expense ratios, but as you know, when it comes to ETFs, there's something called the total cost of ownership, and this includes not only the expense ratio, but things like how well an ETF tracks its index and how well an ETF trades. Can you maybe explain this concept to our listeners and talk about Schwab's approach to minimizing these other costs?
David Botset: Absolutely. I think you point out the two that most investors look to first, and that being the expense ratio of the fund and trade commissions. For ETFs, there's a couple of additional elements that go into that total cost of ownership. The first I'd point to is the bid ask spread of an ETF. As we all know, ETFs trade on the exchange in a way that's similar to stocks. Through that process, you buy at the ask price and sell at the bid price. The difference between that bid ask spread, which can be as small as a penny, or it can be broader than that, goes into the total cost of ownership. It's important for investors to understand what that spread cost is in evaluating ETFs. We also look at premium and discount to net asset value. Mutual funds, you buy and sell on a daily basis at the fund's net asset value. Again, the structure of an ETF trading on an exchange means you're buying at a price that can differ from the net asset value. If that ETF is trading above the net asset value, it's trading at a premium. If it's trading below that, it's at a discount. You want to take that difference to net asset value into account in making the investment decision, and understanding that total cost of ownership. The last item I would point to is the tracking difference, and that's how well an ETF tracks the index that it seeks to deliver the performance of.
Nate Geraci: David, for the average investor out there, is there an easy way for them to find out the total cost of ownership on a particular ETF?
David Botset: Yeah, I think there absolutely is. I think the first place to start is with the issuer's website. These items, the bid ask spread, the premium discount to net asset value, tracking differences, those are all reported on the issuer's websites. You can find that information and do the calculation to understand what that total cost of ownership is for you. I think many of the firms that you work with in buying and selling ETFs will also try to do that assemblage of information to help inform investors to make the right investment decision.
Nate Geraci: To give our listeners a better idea on Schwab's approach to ETFs, I thought we might briefly spotlight one of our favorite ETFs, which also happens to be your most popular ETF, the Schwab US Broad Market ETF, ticker symbol SCHB. Can you just briefly walk us through what this ETF holds, and maybe talk about its overall cost of ownership?
David Botset: The Schwab US Broad Market ETF seeks to track an index, it's the Dow Jones US Broad Stock Market Index - that's an index comprised of approximately the largest 2,500 US companies. It gives you broad representation of the US stock market. It selects those securities, and then it uses a very standard, straightforward market capitalization weighting. What that means is you're weighting each individual company by the size of that company. When you look at that total cost of ownership for a product like SCHB, its ticker symbol, it's expense ratio is three basis points. That's one of the lowest in the industry you're going to find. In 2016, that average bid ask spread was also three basis points. To translate, three basis points is .03%, or that equates to about three dollars on a 10 thousand dollar investment over an annualized period. That premium and discount to net asset value that I spoke about, in 2016, that was also about .05%. You start to understand that you combine those numbers, you're paying about .09 to .1% in total cost of ownership over a year's period of time. You'll notice that I didn't talk about commissions, because again, at Schwab, this product trades commission free, so that doesn't go into the total cost of ownership calculation.
Nate Geraci: Our guest today is David Botset, Vice President of Strategy and Product Development at Charles Schwab. Again, Schwab is currently the 5th largest ETF provider in the country. David, one of the fastest growing areas of ETFs is "smart beta". Schwab does offer six fundamental index ETFs, covering both US and international stocks. These all select and weight stocks based on company sales, cash flow, and how much of a company's earnings are distributed back to shareholders. I'm just curious, what's your overall view of the smart beta space, and how can the average investor best filter through all of the different products that are out there?
David Botset: Smart beta is very much a growing segment of the ETF market. I think that nomenclature, smart beta, perhaps overstates, in some cases, what's being delivered. We frequently like to refer to it as strategic beta. That's a definition that Morningstar has come to market with. I think they've done a pretty good job of defining what this means. What they've defined strategic beta as is it's an approach to building an index, and that index seeks to deliver returns or risk profiles that differ from traditional market capitalization weighted indexes. I think that's important to understand those nuances and those differences, because not all strategic beta or smart beta products are the same. I think it's important for investors to understand the strategy that the strategic beta or smart beta product is trying to deliver to them and how that would work within their portfolio.
Nate Geraci: Do you think that this is a space that Schwab will continue to pursue?
David Botset: I think it definitely is, but one of the things we are very cognizant of is not over-complicating the investment decisions for clients. It's that age old analogy of you're in the aisle at the supermarket and you're trying to select that right box of cereal for your children, but you're standing there and you've got 300 different selections of cereal. Which one is right for your child? In many ways, we want to reduce that complexity. We want to do the homework for you and deliver a much more straightforward, streamlined approach to offering the market capitalization we talked about and strategic beta products. Today, that's in the form of fundamental. In the future there may be additions to that, but we want to be very thoughtful in the way that we do that and what we deliver to clients.
Nate Geraci: Again, we're visiting with David Botset, Vice President of Strategy and Product Development at Charles Schwab. David, you briefly began to touch on this earlier, but I do want to ask you about the Schwab ETF OneSource platform. I know you don't specifically handle this area, but I was hoping maybe we could just briefly highlight the basics here. For investors who have an account with Schwab, they can access a lineup of over 200 ETFs from 16 different ETF providers, including Schwab, and all of these ETFs trade commission free. In other words, you don't have to pay the roughly seven dollar ticket charge. Is this simply another way Schwab feels they can lower that total cost of ownership that we were talking about earlier? Even if we're just talking about seven dollars?
David Botset: Absolutely. I think trade commissions are one of the most obvious expenses that clients incur when they're making investments. You're right, Schwab introduced ETF OneSource and today that covers 16 issuers, including Schwab, around 228 ETFs, and 69 Morningstar categories. What we are attempting to deliver is a broad based menu of ETFs available to our clients that trade commission free to further reduce their cost of investing. That can only improve outcomes over time.
Nate Geraci: With 16 different ETF providers offering ETFs on this platform, and again, this includes over 200 ETFs covering just about every nook and cranny of the market - I'm curious, has Schwab considered launching ETFs in any of these areas? Or, is Schwab comfortable sticking to the broader areas of the market and perhaps letting other ETF providers fill in these more narrow segments?
David Botset: You know what? At this stage, we are very focused on filling the broad asset categories. We know and we don't attempt to be all things to all people. We really understand where we think we can deliver the best value to our clients, and we focus on those areas. Other competitors and other sponsors in the market can deliver their value in other segments that are best suited to them and we will allow them to deliver those products on our platform, and really partner with them for the right outcome for investors.
Nate Geraci: Well, David, with that, we'll have to leave it there. Certainly a pleasure visiting with you today and we hope to have you on the program again in the future. Thank you.
David Botset: Thank you so much. Appreciate the opportunity.
Nate Geraci: That was David Botset, Vice President of Strategy and Product Development at Charles Schwab. You can learn more about Schwab ETFs and the Schwab ETF OneSource platform by visiting SchwabETFs.com.