Past CFO Commentary

The commentary in this section speaks only as of the date specified below. The company makes no commitment to update any of this information.

March 31, 2014

As I mentioned in my last post, here are a few more thoughts on the evolution of client behavior during the market recovery, which is now a full five years along:

With the S&P 500 up over 170% from its lowest point in the first quarter of 2009 and setting new records, it's not really surprising to see investors put cash back to work in the markets.  There are, however, some interesting aspects to the way our clients have reallocated their holdings across products and asset classes during the recovery thus far.

At the height of the crisis, client cash as a percentage of total client assets peaked at 24% as clients reduced their allocations to individual equities and mutual funds while at the same time increasing their exposure to ETFs and fixed income. Following the market bottom in March 2009 we saw clients work down their cash positions to historically normal levels of about 13%, and return to equities at proportions we have not seen since the first half of 2008.

Unique to this recovery has been the greater utilization of ETFs, which appears to have supplanted what would otherwise have been allocated to individual equities. You can see in the chart below that mutual funds have returned to normal levels while individual equities remain lower—by about 4 percentage points—as ETFs have grown to 9% of client assets over the same period. You can also see that direct holdings of fixed income securities have not only declined from the market bottom, but actually dropped below the pre-crisis level. Our data indicates that clients have kept the mutual fund portion of their fixed income exposure relatively constant at a low double-digit percentage of client assets since the market bottom.  Their overall exposure was approximately 20% of client assets at year-end 2013, roughly the pre-crisis level.  Thus mutual funds now account for the majority of clients' fixed income exposure at Schwab in this persistently low rate environment.

So cash and mutual funds are now back to pre-crisis levels, clients favor fixed income funds over direct exposure as they grapple with interest rates, and ETFs are taking a bigger piece of the asset pie.  As ETF utilization continues to grow in our client base, we plan to expand our disclosures in this area. Beginning with our first quarter earnings release, we will report ETF flows in the Monthly Market Activity Report and total balances in the Growth in Client Assets and Accounts Table.

Asset allocation as a percentage of Total Client Assets