Charles Schwab (NYSE:SCHW) manages over $1.5 trillion in client asset either directly or through registered investment advisors (RIAs), and the company is making a big bet on ETFs. Currently, Charles Schwab manages less than $5 bn of ETFs that carry no commission and low expense ratios for its customers and this compares very low to Blackrock (NYSE: BLK), which manages $600 bn in ETFs, which works out to around 20% of its assets under management. While we don’t expect ETFs to be a huge money maker for Charles Schwab independently, it helps the company keep pace with industry trends to gain new as well as maintain existing clients.
We have a $16 price estimate for Charles Schwab, which is around 30% ahead of the market price.
Free ETFs Trading and ETFs for 401k Accounts
Charles Schwab recently announced that it will offer 401k plans in which Schwab will invest in both ETFs and indexed mutual funds rather than mutual funds only. An advantage of ETFs is the significant cost savings for the asset manager/broker which is partly passed on to the investor. ETFs also allows investors to invest in foreign equity, bonds and currency in tax efficient ways.
Blackrock, the world’s largest asset manager, has about 15% of its total assets under management in ETFs and Charles Schwab has 0.3% of total client assets in ETFs. Blackrock earns about $4 on every $1,000 managed in ETF while Charles Schwabs earns only $1.20 on client’s $1,000 managed. This fee is across all types of client assets managed like mutual fund assets, proprietary asssets, clearing assets and others.
By aggressively promoting ETFs, Charles Schwab can increase the proportion of ETFs to 5% in the next 5 years (1% each year). At the same time, Charles Schwab will be able to charge $2 per $1,000 ETF managed compared to $4 charged by Blackrock. This will lead to extra revenue of $0.80 per $1000 ETF.
The excess cash profit for the next five years will be: