Schwab’s New High-Yield Bond ETF Is Tied for Cheapest on the Market

(Bloomberg) — Schwab Asset Management is seeking to draw investors to its high-yield bond exchange-traded fund with one of the lowest fees in the industry, even as rising rates and default fears rattle the asset class.

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The Schwab High Yield Bond ETF, which debuts Tuesday, trades under the ticker SCYB and charges just 10 basis points annually. That matches the fee on the $1.2 billion SPDR Portfolio High Yield Bond ETF (SPHY).

While the new Schwab ETF is just a basis point away from becoming the cheapest junk bond ETF in the $75 billion category, Schwab’s David Botset is confident in its ability to attract investors. While passively managed funds such as SCYB need to be low-cost to gain traction in an increasingly saturated industry, at 10 basis points and below, it’s a marginal boost, he said.

“Cost is clearly a differentiating factor when it comes to products, especially in the index space,” Botset, Schwab’s head of equity product management and innovation, said in a phone interview. However, “what we’re increasingly seeing when you get down to that level of pricing, one or two basis points doesn’t become the tie-breaking decision.”

Of the more than 100 US junk bond ETFs today, the $13.5 billion iShares iBoxx High Yield Corporate Bond ETF (HYG) is the biggest and one of the more expensive with an annual fee of 49 basis points. The $9.2 iShares Broad USD High Yield Corporate Bond ETF (USHY) charges 15 basis points, while the $8.3 billion SPDR Bloomberg High Yield Bond ETF (JNK) has an expense ratio of 40 basis points.

Against that backdrop, and given Schwab’s massive presence among retail investors with brokerage accounts, SCYB should flourish, according to Bloomberg Intelligence.

“It’s going to be successful at raising assets,” Bloomberg Intelligence senior ETF analyst Eric Balchunas said. “When you’ve got 34 million brokerage accounts largely made up of people who love low-cost investing, it’s a good formula for ETF assets.”

SCYB sets sail as concerns over a hawkish Federal Reserve and climbing default fears rattle high-yield bonds. Those worries have driven a $6.4 billion exodus from junk bond ETFs this year while nearly $45 billion has flowed into the funds holding investment-grade rated debt.

The fund’s underlying index caps exposure to any single debt issuer at 2%, which should mitigate concentration risk to any troubled firms, Botset said.

“Diversification in high-yield is really important,” Botset said. “You’re looking at an increased potential of defaults, and recoveries in that space typically aren’t as high as in investment grade.”

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