Bloomberg News

Schwab to Sell ETFs With Arnott’s Non-Traditional Indexes (1)

August 08, 2013

Aug. 8 (Bloomberg) ---- Charles Schwab Corp. (SCHW:US), the largest U.S. independent brokerage, is starting six exchange-traded funds that track non-traditional indexes pioneered by Robert Arnott.

The ETFs will use an index methodology created by Arnott, founder of Research Affiliates LLC, San Francisco-based Schwab said today in a statement. Known as fundamental indexes, the benchmarks weight stocks based on factors such as cash flow and dividends, rather than pure market capitalization. The six ETFs, scheduled to debut Aug. 15, will track U.S. stocks, international and emerging-market equities, according to Schwab.

ETFs have grown in popularity among both institutional investors, who use them to trade, and financial advisers who use them to build portfolios for clients. U.S. ETFs had $1.54 trillion in assets as of the end of July, according to data compiled by Bloomberg. Investors have poured $81.6 billion into U.S. and international stock ETFs this year through July, according to Morningstar Inc. (MORN:US) in Chicago. Unlike mutual funds, ETFs are traded throughout the day like stocks.

“These ETFs adds a new flavor to our ‘pure vanilla’ ETF market-cap lineup,” Marie Chandoha, president of Charles Schwab Investment Management, said in the statement.

Schwab’s investment-management subsidiary, which currently offers 15 ETFs, had more than $205 billion in assets under management as of June 30, with $12 billion in ETFs. The unit’s assets include $4.5 billion in mutual funds that use a methodology pioneered by Newport Beach, California-based Research Affiliates.

$149 Billion

Arnott’s strategies are used to run $149 billion in assets worldwide, according to his firm’s website. Arnott, 59, also manages two asset-allocations funds for Pacific Investment Management Co., the $33.4 billion Pimco All Asset Fund (PAAIX:US) and the $32.9 billion Pimco All Asset All Authority Fund.

Arnott’s fundamental-indexing strategy is not universally accepted. In a 2007 interview in the Journal of Indexes, Eugene Fama, a University of Chicago professor who helped develop the efficient market hypothesis, said Arnott’s methods simply capture the “value effect” to buy cheaper securities, much the way stock pickers do. Arnott has said that traditional market-capitalization weighted indexes have a bias toward stocks that have run up in value.

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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Companies Mentioned

  • SCHW
    (Charles Schwab Corp/The)
    • $29.52 USD
    • 0.28
    • 0.95%
  • MORN
    (Morningstar Inc)
    • $68.59 USD
    • 0.05
    • 0.07%
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