New addition to ETF line-up represents many “firsts”: Schwab’s first ESG fund and first active ETF, as well as the first ETF sub-advised by Ariel Investments
Schwab Asset Management, the asset management arm of The Charles Schwab Corporation, today announced it is launching the Schwab Ariel ESG ETF (SAEF), an active, semi-transparent (also known as non-transparent) ETF that invests in small- and mid-cap stocks that have been screened based on environmental, social and governance (ESG) factors. The new ETF will be sub-advised by Ariel Investments, LLC (“Ariel”). Ariel, the first African American-owned investment firm in the U.S., brings nearly 40 years of experience integrating ESG factors into every phase of its investment process. The first day of trading is expected to be on or about November 16, 2021.
“Schwab is focused on empowering clients and we know that investing in-line with one’s values is increasingly important to many investors,” said Rick Wurster, President, The Charles Schwab Corporation. “We are very excited to introduce the Schwab Ariel ESG ETF in collaboration with Ariel. Together, we believe our unparalleled ETF and ESG capabilities can help investors achieve their financial goals.”
The Schwab Ariel ESG ETF will provide investors with access to the proprietary ESG investment process pioneered by Ariel. The fund seeks to deliver long-term capital appreciation by leveraging Ariel’s value-based investment process, which is focused on small- and mid-cap U.S. companies with favorable ESG characteristics as measured by Ariel’s ESG risk rating process.
The Schwab Ariel ESG ETF can serve as a core or complementary equity ESG allocation within a portfolio. The fund has an operating expense ratio (OER) of 59 bps.
“We are delighted to expand our long-standing relationship with Schwab and bring our value-based, high conviction ESG approach to the market in this new ETF,” said John W. Rogers, Jr., Founder, Chairman, Co-CEO, and Chief Investment Officer, Ariel Investments. “ESG has influenced how Ariel invests and engages since our founding in 1983. We believe in a more rigorous and thoughtful approach to ESG investing that uses proprietary analysis to gain a nuanced view of ESG risk, instead of relying solely on third-party rating systems. As long-term investors, we are driven by dialogue, not dictates. As a firm, we consistently engage with portfolio company management teams to address ESG issues deemed material to their financial health.”
The Schwab Ariel ESG ETF offers active management in a semi-transparent ETF. Ariel’s focus on value and small- and mid-cap equity securities differentiates the new ETF from most ESG strategies, which tend to skew toward growth and large-cap securities. Ariel will leverage its proprietary ESG research to derive a proprietary ESG-risk rating for each holding, or prospective holding, in the fund. In addition, Ariel will employ a negative screening process in the fund’s security selection, which seeks to exclude from the fund companies whose primary source of revenue is derived from the production or sale of tobacco products, the exploration for or the extraction of fossil fuels, the operation of private prisons or jails, and the manufacture of firearms, personal weapons, small arms, or controversial military weapons.
“At Schwab we deliver investment choices, resources and education,” said Malik Sievers, Head of ESG Strategy, Schwab Asset Management. “Our first proprietary ESG fund addresses a clear gap in the market for a small- to mid-cap ESG fund managed through a value investing lens. We are excited to bring investors a new option for incorporating ESG into their portfolios and which may help them to tailor their exposure to ESG investing based on their goals and preferences.”
The fifth largest provider of ETFs, Schwab Asset Management has more than a decade of experience managing ETFs and a robust capital markets team that plays a crucial role in ensuring the Schwab ETFs function efficiently. Schwab’s holistic approach to ESG includes educational resources and broad access to third-party ESG products, in addition to this new proprietary offering. Ariel brings a distinctive actively managed, bottom-up investment approach aimed at driving long-term results for investors. Its tailored approach recognizes ESG issues as material to business outcomes and views management teams as collaborative partners in strengthening ESG performance. The Schwab Ariel ESG ETF will have two co-lead portfolio managers, John W. Rogers, Jr., and Kenneth Kuhrt, who are supported by Ariel’s dedicated ESG team.
Schwab and Ariel Investments have a long-standing relationship and have collaborated for over 20 years on the Ariel-Schwab Black Investor Survey, a body of research that explores the similarities and differences between Black and white Americans when it comes to saving, investing, and other financial priorities.
For more information, review the prospectus here.
About Schwab Asset Management
Schwab Asset Management offers a focused lineup of competitively priced ETFs, mutual funds and separately managed account strategies designed to serve the central needs of most investors. As part of the Charles Schwab organization, we champion the needs of investors and seek to enhance the financial lives of our clients in all we do. Operating our business through clients’ eyes and putting them at the center of our decisions, we aim to deliver exceptional experiences to investors and the financial professionals who serve them. Established in 1989, Schwab Asset Management manages more than $640.5 billion in assets and draws on the knowledge and expertise of more than 119 investment professionals (figures as of 9/30/2021). More information is available at www.schwabassetmanagement.com.
About Charles Schwab
At Charles Schwab we believe in the power of investing to help individuals create a better tomorrow. We have a history of challenging the status quo in our industry, innovating in ways that benefit investors and the advisors and employers who serve them, and championing our clients’ goals with passion and integrity.
More information is available at www.aboutschwab.com. Follow us on Twitter, Facebook, YouTube and LinkedIn.
About Ariel Investments
Ariel Investments, LLC is a global value-based asset management firm founded in 1983. Ariel is headquartered in Chicago, with offices in New York City, San Francisco, and Sydney. As of September 30, 2021, Ariel’s firm-wide assets under management, including subsidiaries, totaled approximately $17.3 billion. Ariel serves individual and institutional investors through five no-load mutual funds and nine separate account strategies. For more information, please visit Ariel’s website at arielinvestments.com.
Disclosures:
This fund is different from traditional ETFs.
Traditional ETFs tell the public what assets they hold each day. This fund will not. This may create additional risks for your investment. For example:
- You may have to pay more money to trade the fund’s shares. This fund will provide less information to traders, who tend to charge more for trades when they have less information.
- The price you pay to buy fund shares on an exchange may not match the value of the fund’s portfolio. The same is true when you sell shares. These price differences may be greater for this fund compared to other ETFs because it provides less information to traders.
- These additional risks may be even greater in bad or uncertain market conditions.
- The ETF will publish on its website each day a “Proxy Portfolio” designed to help trading in shares of the ETF. While the Proxy Portfolio includes some of the ETF’s holdings, it is not the ETF’s actual portfolio.
The differences between this fund and other ETFs may also have advantages. By keeping certain information about the fund secret, this fund may face less risk that other traders can predict or copy its investment strategy. This may improve the fund’s performance. If other traders are able to copy or predict the fund’s investment strategy, however, this may hurt the fund’s performance.
For additional information regarding the unique attributes and risks of the fund, see Proxy Portfolio Risk, Premium/Discount Risk, Trading Halt Risk, Authorized Participant Concentration Risk, Tracking Error Risk and Shares of the Fund May Trade at Prices Other Than NAV in the Principal Risks and Proxy Portfolio and Proxy Overlap sections of the prospectus and/or the Statement of Additional Information.
Investors should consider carefully information contained in the prospectus, or if available, the summary prospectus, including investment objectives, risks, charges and expenses. You can obtain a prospectus, or if available, a summary prospectus by visiting schwabassetmanagement.com/schwabetfs_prospectus. Please read it carefully before investing.
Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares of ETFs are bought and sold at market price, which may be higher or lower than the net asset value (NAV).
Active Semi-Transparent (also known as Non-Transparent) ETF Risk: Active semi-transparent ETFs operate differently from other exchange-traded funds (ETFs). Unlike other ETFs, an active semi-transparent ETF does not publicly disclose its entire portfolio composition each business day, which may affect the price at which shares of the ETF trade in the secondary market. Active semi-transparent ETFs have limited public trading history. There can be no assurance that an active trading market will develop, be maintained or operate as intended. There is a risk that the market price of an active semi-transparent ETF may vary significantly from the ETF’s net asset value and that its shares may trade at a wider bid/ask spread and, therefore, cost investors more to trade than shares of other ETFs. These risks are heightened during periods of market disruption or volatility.
Proxy Portfolio Risk: Unlike traditional ETFs, this fund does not disclose its portfolio holdings (Actual Portfolio) daily. The fund instead posts a Proxy Portfolio on its website each day. The Proxy Portfolio is designed to reflect the economic exposures and risk characteristics of the fund’s actual holdings on each trading day, but it is not the same as the fund’s Actual Portfolio. Although the Proxy Portfolio is intended to provide investors with enough information to allow for an effective arbitrage mechanism that will keep the market price of the Fund at or close to the underlying NAV per Share of the Fund, there is a risk (which may increase during periods of market disruption or volatility) that market prices will vary significantly from the underlying NAV of the fund. ETF trading on the basis of a published Proxy Portfolio may trade at a wider bid/ask spread than ETFs that publish their portfolios on a daily basis, especially during periods of market disruption or volatility, and therefore may cost investors more to trade. Also, while the Fund seeks to benefit from keeping its portfolio information secret, market participants may attempt to use the Proxy Portfolio to identify a Fund’s trading strategy, which if successful, could result in such market participants engaging in certain predatory trading practices that may have the potential to harm the Fund and its shareholders.
Proxy Portfolio Construction – The Proxy Portfolio is designed to recreate the daily performance of the Actual Portfolio. This is achieved by performing a “Factor Model” analysis of the Actual Portfolio. The Factor Model is comprised of three sets of factors or analytical metrics: market-based factors, fundamental factors, and industry/sector factors. The fund uses a “Model Universe” to generate its Proxy Portfolio. The Model Universe is comprised of securities that the fund can purchase and will be a financial index or stated portfolio of securities from which fund investments will be selected. The results of the Factor Model analysis are then applied to the Model Universe. The Proxy Portfolio is then generated as a result of this Model Universe analysis with the Proxy Portfolio being a small sub-set of the Model Universe. The Factor Model is applied to both the Actual Portfolio and the Model Universe to construct the fund’s Proxy Portfolio that performs in a manner substantially identical to the performance of its Actual Portfolio.
The Proxy Portfolio will only include investments the fund is permitted to hold. The fund’s SAI contains more information on the Proxy Portfolio and its construction. Proxy Portfolio and Proxy Overlap Information regarding the contents of the Proxy Portfolio, and the percentage weight overlap between the holdings of the Proxy Portfolio and a Fund’s Actual Portfolio holdings that formed the basis for its calculation of NAV at the end of the prior Business Day (the Portfolio Overlap), is available by visiting the fund’s website www.schwabassetmanagement.com
Because environmental, social and governance (ESG) strategies exclude some securities, ESG-focused products may not be able to take advantage of the same opportunities or market trends as products that do not use such strategies. Additionally, the criteria used to select companies for investment may result in investing in securities, industries or sectors that underperform the market as a whole.
Value investing attempts to identify undervalued companies with characteristics for improved valuations. Securities that exhibit value characteristics tend to perform differently and shift in and out of favor with investors depending on changes in market and economic conditions. As a result, the fund’s performance may at times fall behind the performance of other funds that invest more broadly or in securities that exhibit different characteristics.
Small cap funds are subject to greater volatility than those in other asset categories.
Mid-cap companies may be more vulnerable to adverse business or economic events than larger, more established companies and the value of securities issued by these companies may move sharply.
Schwab Asset Management is the investment adviser and Ariel Investments, LLC is the sub-advisor.
Schwab Asset Management is the dba name for Charles Schwab Investment Management, Inc. (CSIM). Schwab Asset Management is a part of the broader Schwab Asset Management Solutions organization (SAMS), a collection of business units of The Charles Schwab Corporation aligned by a common function—asset management-related services—under common leadership. CSIM and Charles Schwab & Co., Inc. (Schwab) Member SIPC are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.
Schwab ETFs are distributed by SEI Investments Distribution Co. (SIDCO). Ariel Investments, LLC and SIDCO are not affiliated with The Charles Schwab Corporation or any of its affiliates.
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