Schwab, along with Vanguard and Fidelity, are the three leading providers of low-cost index funds to investors. Each offers many ETFs and index funds for investors to choose from, and each has been aggressively cutting their expense ratios and promoting new offerings to attract the ever-increasing amount of money flowing into passively-managed investments.

Schwab unveiled their newest ETF offering last week, the Schwab 1000 Index ETF (SCHK). At an expense ratio of 0.05% and tracking the largest 1000 companies in the United States, it’s been getting some interest from investors. Let’s take a look whether this ETF makes sense for your portfolio.

Schwab 1000 Index ETF Composition and Expenses

While Schwab is aggressively promoting this new ETF through press releases and blog posts, the index it tracks, the Schwab 1000 Index, has been around for a while. The Schwab 1000 index consists of the 1000 largest companies in the United States. On the other hand, the benchmark large-cap index, the S&P 500, contains approximately 500 stocks.

Schwab began offering investors access to the Schwab 1000 Index through an index fund back in 1991. This index fund, SNXFX, currently has $7.5 billion under management, which is less than the $29.2 billion in Schwab’s S&P 500 index fund (SWPPX), and far less than the┬áthe $126 billion in Fidelity’s S&P 500 index fund and the $350 billion invested in Vanguard’s S&P 500 index fund.

Schwab 1000 Index Historical Returns

While SCHK is brand-new and we don’t have historical returns for the Schwab 1000 Index ETF, we do have 25 years of historical returns for the Schwab 1000 Index and its related index fund. Here’s how the Schwab 1000 Index has done compared to the S&P 500, according to Schwab:

Timeframe Schwab 1000 Index S&P 500 Index
5yr 14.56% 14.66%
15yr 7.06% 6.69%
25yr 9.80% 9.10%

But how did actual investors in the SNXFX Schwab 1000 Index Fund fare compared to the S&P 500? Let’s look at the historical returns of SNXFX from Morningstar (data as of 10/13/17):

Timeframe SNXFX S&P 500 Index
1yr 22.11% 22.21%
5yr 14.40% 14.72%
15yr 9.91% 9.96%

And a hypothetical $10,000 invested at the fund’s inception in April 1991 would now be worth approximately $114,000, compared to $119,000 invested in the S&P 500, according to Morningstar. What explains the difference between Schwab’s and Morningstar’s numbers?

Fees.

Schwab’s marketing documents list the return of the Schwab 1000 Index and S&P 500, without the fees of investing in the index. However, when actually investing in the underlying index, there is money lost to fees and tracking error.

Of course, there are also fees associated with investing in the S&P 500, and the difference in fees between purchasing SCHK or SCHX (Schwab Large-Cap ETF) is negligible. It’s impossible to say whether the historical outperformance of the Schwab 1000 Index over the S&P 500 Index will continue in the future.

Should You Invest In Schwab 1000 ETF (SCHK)?

One major part of Schwab’s marketing campaign for SCHK is its lower fees compared to comparable ETFs with other brokerages. Specifically, they tout SCHK’s 0.05% expense ratio compared to the 0.12% expense ratio of VONE, Vanguard’s Russell 1000 ETF, and the 0.15% expense ratio of IWB, iShares’s Russell 1000 ETF.

There are already great alternatives

If you could only invest in a 1000-stock index fund, then Schwab would have the cheapest option. But there are plenty of other ways to get access to large-cap stocks or the U.S. Total Stock Market. Even through Schwab, SCHX and SCHB track large-cap stocks and the total stock market for 0.03%, less than SCHK’s expense ratio. So while Schwab is continuing to offer funds with slightly lower expense ratios than its competitors, the comparison between SCHK, VONE, and IWB ends up being mostly about marketing.

Avoid investing in new ETFs

Another issue with investing in SCHK is simply how new it is. While in theory it’s the “newest toy” on the passive investing scene, it is essentially a repackaging of an investment that you can already get at Schwab and elsewhere through S&P 500 or Total Stock Market index funds.

While some people enjoy being an early adopter to technology, I would not apply this same logic to investing, especially in this case. There’s no benefit to owning the Schwab 1000 index fund over a S&P 500 index fund or total stock market fund, but there are some risks.

If SCHK flops, Schwab could close down the ETF within a few years. In that case, the ETF would liquidate and could create capital gains that you didn’t intend to have. The likelihood of this liquidation scenario is much lower with an established index fund or ETF with hundreds of billions in assets and a 10+ year track record.

Being an early-adopter, while potentially beneficial in technology like the iPhone, doesn’t make sense for this ETF.

Conclusion

While SCHK is an interesting ETF and additional low-cost ETF options are always welcome to increase the amount of money allocated to passive investing, I would hesitate from putting money into SCHK at this time. There are excellent alternatives to SCHK at Schwab and elsewhere, and there is no benefit to being an early adopter of this ETF.

What do you think? Would you buy SCHK? Do you think this ETF will gain traction and attract money?

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