(Bloomberg) — Wall Street’s model-portfolio boom appears to have flashed its invisible power for the second time in this week after a once-sleepy Charles Schwab Corp. bond exchange-traded fund received another monster inflow.
About $2.6 billion entered the Schwab 5-10 Year Corporate Bond ETF (ticker SCHI) on Thursday, according to data compiled by Bloomberg, adding to the nearly $2 billion that flowed into the fund on Monday. Assets in the ETF have surged more than ten-fold from the end of last week, racking up the largest inflows among US ETFs tracked by Bloomberg over that period.
While it’s often difficult to determine precisely who is behind a fund flow, such large additions suggest the adjustment of a model portfolio. These products are essentially off-the-shelf investment strategies, usually comprising a set of ETFs, which are offered by large asset managers direct to their investors.
Falling fund management costs, improving technology and a new era of retail investing have combined to see their popularity explode in recent years.
Schwab did not comment on the Thursday inflow except to say the firm periodically reviews and updates “the asset allocations and ETF selections across our packaged solutions.” The firm has been under pressure this month as scrutiny of the US banking sector battered the brokerage.
Read more: Schwab Eyes Worst Month Since 1987 as Cash Shifts to Money Funds
It’s hard to gauge the exact size of the model portfolio industry on Wall Street because many money managers don’t publish figures, but it’s thought they now command trillions of dollars of assets.
Schwab is one of many asset managers, including BlackRock Inc. and Vanguard Group, that employs model-portfolio investing. “When they make a change it’s in like one fell swoop,” said Bloomberg Intelligence’s Athanasios Psarofagis. “It’s very noticeable.”
It’s unclear whether model adjustments are behind the Schwab ETF’s booming week, but a number of clues suggest that is the case. For one, managers often balance or change portfolios on set schedules. Friday marks the end of the first quarter — a common milestone for monetary reshuffling.
Secondly, another Schwab ETF also focused on bonds — Schwab US TIPS ETF (ticker SCHP), targeting US inflation-protected Treasury securities — saw a large outflow of close to $1.3 billion on Thursday, although the inflows and outflows of the two Schwab funds don’t match up exactly. Through Thursday’s close, SCHP has gained some 2.7% since the beginning of March, while SCHI has added 3.1%.
Todd Sohn, an ETF strategist at Strategas Securities, said that a manager could have moved money from SCHP to SCHI because they “like the risk – reward there.”
“No surprise either,” Sohn said. “The yields investors are receiving across the curve are much different than the last 10+ years.” SCHI targets bonds issued by companies in the industrials and financials sectors, mostly focusing on bottom-tier (BBB) investment grade ratings.
Even so, Dave Lutz, head of ETFs at JonesTrading, said it’s not clear that the inflow is the result of a model readjustment. The $4.6 billion could have come from an outside investor who injected new capital into the Schwab universe — enticed by the once drowsy corporate bond ETF.
The fund is “practically risk free,” he said. Plus, as investors cycle money out of low-interest savings accounts, an ETF can provide a similar appeal as money market funds that have piqued investor interest of late.
Simply put: SCHI’s returns are a “heck of a lot better than what savings accounts pay,” Lutz said.
–With assistance from Sam Potter.