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Charles Schwab Corp. files to launch 'crypto' index ETF and 'jumps the track' of its product development guardrails, while Vanguard and others will likely heed the locomotive roaring into the market

The Westlake, Texas broker-dealer and custodian of $8 trillion of AUA promises an in-house 'crypto-tangential' index that is all but certain to disrupt pricing and send alarms to other holdouts.

Thursday, March 3, 2022 – 12:07 AM by Brooke Southall
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Walt Bettinger: We’re keeping our eyes [on] ... whether there’ll be an investor-oriented product... that will deliver crypto investing.'

Marking at least a token nod to the crypto-investing craze, Charles Schwab Corp. has filed to launch a passive 'crypto' ETF and is creating the index that it will use to invest.

The move may, or may not, be a big moneymaker for Schwab, but it will almost certainly impact the industry, analysts say. For starters, it will likely drive down pricing and make Vanguard Group rethink its timetable for offering RIAs a cryptocurrency option in some form.

Eric Balchunas
Eric Balchunas: 'I was a little bit shocked.'

The Westlake, Texas broker-dealer and custodian of $8 trillion of AUA applied today to the Securities and Exchange Commission (SEC) for the right to sell the new Schwab Crypto Economy ETF on the New York Stock Exchange Arca (the NYSE digital exchange).

Schwab's asset management division, Charles Schwab Investment Management, will handle the product. 

The Schwab move caught crypto and ETF watchers alike off guard because it ends its crypto reticence but also deviates radically from how it built its roster of ETFs.

"I was a little bit shocked," says Eric Balchunas, ETF analyst for Bloomberg. "But also, not really. Schwab would be about the last to fall. Vanguard would be the last."

It will happen

Schwab is clear that this ETF will not hold spot Bitcoin or other digital assets knowing the SEC has rejected every other application. See: The SEC effectively says 'no,' again, to Bitcoin ETFs with request for public comment, allowing Charles Schwab & Co. to keep its cover and steer clear of crypto for now

Schwab's chief rival, Fidelity Investments, only sells a bitcoin ETF in Canada where regulators have been won over. See: Fidelity gets its crypto ETF --albeit Made in Canada -- giving RIAs a way to buy 'physical' Bitcoin

What is not a matter of suspense here is whether the SEC will approve Schwab's ETF application in short order, says Ben Johnson, an ETF analyst for Morningstar.

"It is an equity ETF, so I have no doubt that it will be approved," he says.

Indeed, Balchunas says that 12 or 15 reasonably similar blockchain ETFs already exist in the marketplace, though they're not all that popular. Combined they have AUM of about $2 billion.

Companies that Schwab might conceivably include in its crypto index include Coinbase and Robinhood, two firms that pulled off IPOs last year, at least in part, because Schwab chose not to enter crypto markets where those Silicon Valley firm earn their bulk of revenues.

Becoming a player

Unlike Schwab, Vanguard has yet to signal that it's doing research on a way to offer exposure to crypto assets.

Ben Johnson
Ben Johnson: ' I have no doubt that it will be approved.'

Indeed, Schwab CEO Walter Bettinger has made clear on multiple occasions that his company is torn about offering a crypto product.

He hears the rising clamor from his investors for a Schwab offering and made noises about this type of launch as far back as April of 2021 during a company analysts call.

"We recognize well what's going on," he said. 

"We would like to see more regulatory clarity, and if and when that comes, you should expect Schwab to be a player in that space in the same way it has been in other investment opportunities across the spectrum."

"We’re keeping our eyes [on] ... whether there’ll be an investor oriented product, ETF, or another that will deliver crypto investing to a larger part of the market than can get it today," he added.

Schwab's entry into the "crypto"-related ETF category will be the most significant to date because Schwab tends to enter ETF markets at ultra-inexpensive rates.

Notable departure

Currently the lowest-price crypto-related ETF is Global X Blockchain (BKCH) and it charges 50 basis points. Balchunas predicts Schwab is likely to price its new ETF at about 25 basis points.

"They face a ton of competition in the crypto-tangential equity ETF space, where there are at least a dozen incumbents--depending on your definition," Johnson adds.

Pricing aside, this ETF launch -- very much a theme product -- gets Schwab way out of its mode of selling giant, plain-vanilla index funds where it can out-scale competitors and pass on low prices and high liquidity, the analysts say.

"This is a notable departure from Schwab's historical ETF product development track," Johnson says. "In fact, I'd say they've jumped the track here."

Demand driven

No argument from Balchunas.

"I would totally agree with that," he says. "This is not their bag. They do vanilla and wholesome. They don't do cute."

Yet Schwab embracing its inner cute to deal with an overriding principle -- the customer is always right.

"RIAs need something," Balchunas says. "They're getting requests. This is a sign of just how many requests they're getting."



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