Schwab lists ultra-cheap bond ETFs

USA

Charles Schwab lists more ultracheap bond ETFs

Charles Schwab is doubling down on its make everything free gambit, listing three new core bond ETFs with fees so low they’re basically, well, free…

  • Schwab 1-5 Year Corporate Bond ETF (SCHJ) – 0.06%
  • Schwab 5-10 Year Corporate Bond ETF (SCHI) – 0.06%
  • Schwab Long-Term U.S. Treasury ETF (SCHQ) – 0.06%

The funds are all plain vanilla and biscuit tin and provide different duration profiles for US corporate bond and treasuries. They all track the relevant Bloomberg Barclays bond indexes that their fund names suggest. As expected, they’ll use sampling to track their indexes. 

Analysis – Buy SCHW and hedge with SCHQ

After they slashed brokerage to zero, TD Ameritrade, Schwab, E*Trade were all given a curb stomp. Seeing that brokerage reportedly made 10 – 25% of their revenues, traders sold their share prices down a corresponding 10 – 25%.

My own view is that the discount brokers have been oversold. If anything free brokerage will make them even more money. With free brokerage there’ll be more transactions and very probably more clients. More transactions and clients will mean more data; more order flow; more net interest. 

Where the real risk for the discount brokers probably lies is in lower interest rates, which compresses net interest. Here, however, the newly listed SCHQ could help. If interest rates do go to zero (I think they will) SCHQ, with its long duration profile, could provide a useful hedge. 

Pacific Life lists actively managed income ETFs

Pacific Life, the Californian insurance giant founded by Leland Stanford, is listing two new active managed ETFs. Both will be sub-advised by Cadence Capital Management.

  • Pacific Global Focused High Yield ETF (FJNK)
  • Pacific Global International Equity Income ETF (IDY)

IDY buys quality EAFE companies with good dividends. It aims to hold 200 – 450 companies, weighted by market capitalisation with weightings capped at 2.5%.

FJNK will buy 60 – 90 junk bonds, that are judged liquid enough and have solid fundamentals. While no trading strategy is spelled out, the prospectus says the managers will conduct relative value trades.

The funds charge 0.39%.