Schwab Asset Management, the fifth-largest provider of exchange-traded funds (ETFs) in the U.S., has announced plans to launch its second actively managed bond ETF next month, the Schwab Core Bond ETF (SCCR). This move reflects the growing demand for actively managed strategies in the fixed income space as investors seek professional management to navigate market uncertainties.
The new ETF is set to offer a lower-cost alternative to traditional bond funds, positioning itself competitively in a rapidly expanding segment of the ETF market. Here’s a detailed look at Schwab’s latest product, market trends, and its implications for investors.
The New Schwab Core Bond ETF (SCCR)
Scheduled to begin trading on February 5, 2025, the Schwab Core Bond ETF (SCCR) will charge an expense ratio of just 0.16%, according to the fund’s prospectus. This pricing is significantly lower than competing actively managed core bond ETFs, which typically range between 0.25% and 0.45%.
The reduced expense ratio could offer a meaningful advantage for investors seeking higher net yields and potential total returns.
David Lafferty, Director of Product Management and Innovation at Schwab Asset Management, emphasized the importance of core bonds in investor portfolios:
“Active core bonds are an ‘evergreen’ space and one of the largest fixed income allocations for clients.”
The ETF will focus on investment-grade securities, including:
- Corporate Bonds
- Taxable Municipal Bonds
- U.S. Treasury Securities
By maintaining a diversified portfolio, the fund aims to provide investors with broad fixed income exposure while focusing on quality investments rated BBB- or higher at the time of purchase.
Growing Demand for Actively Managed Bond ETFs
The launch of the SCCR reflects a broader trend of increasing demand for actively managed bond ETFs. As interest rate volatility and global economic uncertainty persist, many investors have shifted towards active management for better risk-adjusted returns and professional oversight.
Schwab’s first actively managed bond ETF, the Schwab Ultra-Short Income ETF (SCUS), launched in August 2024, marked the company’s initial foray into active fixed income strategies. With the launch of SCCR, Schwab is expanding its presence in the actively managed bond space, responding to investor preferences for more dynamic portfolio management.
Why Active Management for Bonds?
- Market Uncertainty: Active strategies allow managers to respond to changes in interest rates, inflation, and global economic conditions more effectively.
- Credit Quality Management: Portfolio managers can adjust allocations based on shifting credit risks.
- Diversification: Active funds often focus on spreading risk across multiple bond sectors and credit tiers.
Experienced Portfolio Management
The Schwab Core Bond ETF will be co-managed by seasoned portfolio managers John Majoros and Brian Luedtke, both of whom have extensive experience in fixed income strategies. They previously supported Schwab’s Wasmer Schroeder Core Bond strategy, which has been in existence since 2008.
The management team’s experience adds credibility to the fund, reinforcing Schwab’s commitment to professional oversight in actively managed fixed income portfolios.
Schwab’s Position in the ETF Market
Schwab Asset Management has a significant presence in the ETF industry, with $374 billion in total ETF assets under management (AUM) as of September 2024. The firm oversees approximately $1.3 trillion in discretionary assets and $40.7 billion in non-discretionary assets, making it a dominant player in the financial services sector.
The addition of the SCCR ETF expands Schwab’s suite of 31 ETFs, including both passive index funds and actively managed strategies. The company’s reputation for low-cost investing and a diversified fund lineup has made it a popular choice among both retail and institutional investors.
Comparing Schwab Core Bond ETF to Competitors
The SCCR stands out in the actively managed bond ETF space due to its low expense ratio and focus on investment-grade securities. Here’s how it compares with other active bond ETFs:
| ETF | Expense Ratio | Focus | AUM |
|---|---|---|---|
| Schwab Core Bond ETF (SCCR) | 0.16% | Core Bonds (Active) | New Launch |
| PIMCO Active Bond ETF (BOND) | 0.57% | Diversified Investment-Grade | $3.5B |
| Vanguard Core Bond ETF (VCRB) | 0.10% | Core Bonds (Passive) | $2.1B |
| iShares US Aggregate Bond ETF (AGG) | 0.03% | Broad Market Bonds (Passive) | $102B |
Key Differentiators for SCCR:
- Lower Cost: At 0.16%, SCCR offers a lower expense ratio than most active peers.
- Quality Focus: Investment-grade securities reduce credit risk.
- Active Management: Potential for outperformance during volatile market periods.
Benefits of Investing in SCCR
Investors seeking reliable fixed income exposure with professional management may find the SCCR appealing due to:
- Diversification: Exposure to multiple fixed income sectors.
- Professional Oversight: Managed by experienced portfolio managers.
- Low Fees: Competitive pricing relative to actively managed peers.
- Quality Focus: BBB- and higher credit ratings target strong credit quality.
Potential Risks to Consider
While the SCCR offers many advantages, there are inherent risks:
- Interest Rate Sensitivity: Bond prices may fall if interest rates rise.
- Credit Risk: Though focused on investment-grade bonds, there is still a risk of rating downgrades.
- Market Volatility: Active management doesn’t guarantee outperformance.
Conclusion: A Strategic Move in the Fixed Income ETF Space
The Schwab Core Bond ETF (SCCR) provides investors with a cost-effective, actively managed fixed income solution, ideal for those seeking diversification and professional management. With its low expense ratio, experienced management team, and focus on investment-grade securities, the SCCR is well-positioned to compete in the growing market for actively managed bond ETFs.
As interest in fixed income strategies continues to rise amid economic uncertainty, the SCCR could become a valuable addition to both retail and institutional portfolios.
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