PRFZ Invesco FTSE RAFI US 1500 Small Mid ETF Trust

Charles Schwab burst onto the ETF scene several years ago with a lineup of broad market ETFs. These funds saw a huge level of interest, pulling in billions largely thanks to the rock-bottom expense ratios and the availability of free-trading on Charles Schwab platforms.

This system has allowed Schwab to build up a sizable $13.5 billion in ETF assets, a pretty good level considering the company had just 15 funds in total. It appears as though Schwab isn’t done with its push into the ETF space though, as the company has just released six new ETFs that look to once again steal market share from some entrenched competitors.

However, these new products will go a bit beyond the current lineup of Schwab offerings and will use fundamental factors to weight securities, instead of just market capitalization. These will all use the ‘RAFI’ methodology developed by Rob Arnott that seeks to break the link between price and weight, using items like cash flow, adjusted sales, and dividends plus buybacks in order to measure company size (see Alternative ETF Weighting Methodologies 101).

This will cost a bit more than the offerings that Schwab currently has on the market, but they will be far cheaper than many of the other fundamental ETFs currently out there. Thanks to this and the free-trading program, these products could attract some interest from investors, though it will likely be a relatively tough battle.

For investors intrigued by this approach, we have highlighted the six new funds in brief detail below:

Domestic Focus:

US Broad Market Index ETF (FNDB) - This product tracks the Russell Fundamental U.S. Index, holding roughly 1,450 stocks in its basket. Costs come in at 32 basis points a year for this ETF, which focuses on a wide range of firms in the U.S. market.

Financials take the top spot at roughly 15.5% of assets, followed closely by energy (14.1%) and consumer discretionary (13.2%). Top individual holdings go to ExxonMobil (4.1%), followed by other oil firms Chevron (2.2%), and ConocoPhillips (1.8%).

US Large Company Index ETF (FNDX) – This new fund follows the Russell Fundamental US Large Company Index, once again charging 32 basis points a year in fees. The product holds roughly 600 stocks in its basket, and it has a large cap blend focus.

Energy and financials take the top spots from a sector look at just under 15%, closely followed by tech and consumer discretionary (respectively at 12.7% and 12.5%). The top three holdings are the same here as they are in FNDB, though there is slightly more in terms of concentration for this ETF (see Active Large Cap ETFs: The Best of Both Worlds?).

US Small Company Index ETF (FNDA) – For a small cap approach, investors have this ETF—which also costs 32 basis points—that tracks the Russell Fundamental US Small Company Index. The product holds about 870 stocks in its basket and it has a small cap blend focus.

Industrials take the top spot at roughly 22% of assets, closely followed by financials (20.9%), and then consumer discretionary (19.1%).  The top individual holdings focus on a trio of airlines with LUV, DAL and UAL taking the top three spots, but accounting for just 1.9% of assets in total.

International Focus:

International Large Company Index ETF (FNDF) – For investors seeking international developed market exposure, FNDF is a new possible choice. The product follows the Fundamental Developed ex-U.S. Large Company Index charging 32 basis points a year in fees, and holding just over 725 stocks in its basket.

Once again, financials are the top spot, accounting for the biggest chunk of assets, though industrials, energy, and consumer discretionary are not too far behind. Top individual holdings include a decent number of well-known firms, including BP, Total, and Royal Dutch Shell (see Time to Buy the Hedged European ETF?).

International Small Company Index ETF (FNDC) – If small caps are more your style, FNDC may be an interesting choice. The product tracks the Russell Fundamental Developed ex-US Small Company Index, charging 46 basis points a year and holding about 1,100 stocks in its basket.

Top sectors for this ETF include industrials, consumer discretionary and financial, while the product is light on utilities, energy, and health care. Top stocks aren’t really the most famous names—a bunch of small cap Japan stocks—while no single stock makes up more than 0.3% of the portfolio.

Emerging Markets Large Company Index ETF (FNDE) – For a focus on emerging markets, investors could consider this product which follows the Russell Fundamental Emerging Markets Large Company Index. The product charges 46 basis points a year in fees, and holds roughly 275 stocks in its basket.

Energy takes the top spot for this ETF, followed by financials and materials, while consumer staples and utilities bring up the rear in terms of exposure. For individual securities, two Russian energy companies—Lukoil and Gazprom—take the top two spots, while Samsung and China Mobile round out the top four (see Are BRIC ETFs in Trouble?).

ETF Competition

The main competitors to the new half-dozen funds from Charles Schwab look to be other products that utilize the RAFI methodology. While there aren’t direct competitors to all of the new Schwab funds, we have briefly touched upon some of the most popular below:

• PowerShares FTSE RAFI US 1000 (PRF) - $2.1 billion in assets, 39 basis point expense ratio.
• PowerShares FTSE RAFI 1500 Small-Mid (PRFZ) - $700 million in assets, 0.39% expenses.
• PowerShares FTSE RAFI Developed Markets ex-US (PXF) - $585 mil in AUM, 0.45% expenses.
• PowerShares FTSE RAFI Emerging Markets ETF (PXH) -$350 mil in AUM, 0.49% expenses.
• Fundamental Pure Large Growth Portfolio (PXLG) - $90 mil in AUM, 0.39% in expenses.

Any of these products could be fierce competitors for Schwab and their new lineup of RAFI funds. However, Schwab does look to have a cost advantage—especially for Charles Schwab brokerage clients—so we will have to see if their new set of ETFs can make inroads and continue Schwab’s rise in the ETF industry.

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