John Sturiale, vice president of product management at Charles Schwab, feels strongly that Schwab’s 15 ETFs are well-positioned to keep capturing market share—particularly since the San Francisco-based firm in September made its expense ratios cheaper than any competing funds.

Speaking to IndexUniverse.com Correspondent Cinthia Murphy on the sidelines of the “Schwab Impact” conference in Chicago, Sturiale graciously tipped his hat to Vanguard, its chief rival in the low-cost space, and was quick to point out that there’s plenty of room for all to thrive in the now-$1.254 trillion U.S. ETF market. That said, Sturiale stressed that Schwab is more than a money management firm, and intimated that, as some suspect, it is selling some of its ETFs at a loss.

While Schwab is open to the possibility of rolling out fundamentally focused alternative beta strategies in an ETF wrapper, Sturiale made clear that the firm will move slowly and methodically with a view to canvassing core asset classes. That caution, and the firm’s formidable distribution network, goes a long way in explaining how the firm’s ETFs have raked in $7.64 billion in assets since the first funds went live three short years ago.

Murphy: Not long after Schwab cut the price on its ETFs, Vanguard announced it was changing indexes to cut costs, and now some of their ETFs will be using the same indexes you use at Schwab. How did you react to that? Did it affect in any way your ETF plans moving forward?

Sturiale: Vanguard is a great company; they have a long legacy of indexing. I don’t know that they necessarily came out with the switch to FTSE indexes because we were using it, but it would be naive for me to tell you that we don’t look at the competition, because we do.

We are trying to look at what we think our clients need and how we can help them more. And in the ETFs we are constructing, we want to be a price leader. We are not trying to start a price war here, but we believe we can be competitive, and we want to have our clients be able to construct the most diversified portfolio at the best cost, and we want them to do it with Schwab.

Murphy: The idea is that if it can be cheaper, it should?

Sturiale: I’m not going to sit here and say, “At all costs, we are going to be the cheapest every day,” but we are going to be competitive and continue to look at the industry’s costs. We want to be a price leader.

Murphy: If Vanguard runs their funds at cost—as they say they do—and your funds are cheaper, are you running your ETFs at a loss?

Sturiale: There’s a distinction between us and the other ETF providers out there. We are not only a money management firm. We have more than $200 billion of assets under management in CSIM [Charles Schwab Investment Management], but we are a full-service firm, so we can complement one business with another where some of the others can’t.

We are going to look at the totality of the relationship. From that perspective, we are going to look and ask, “If we do take a loss here, does it allow the client to have more of a benefit and for us to win more accounts on the other side?” We look at the totality of it. Anybody that can do the math can see that we’ve lowered the fees and it’s going to affect where we are at with our breakeven point in our funds.

But that was not a main decision point when we made the cut. We keep stressing that we look at it more as a totality of the client experience at Schwab, not just a client of CSIM. That’s a very important difference.

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