Charles Schwab SCHW recently filed for a crypto economy exchange traded fund (ETF) with the Securities and Exchange Commission (SEC), signaling that it is seeking growth opportunities tied to digital currencies. The crypto economy ETF is a vehicle that will track equities. Per the prospectus filed by SCHW, the Schwab crypto economy ETF would invest in “stocks that are included in the Schwab Crypto Economy Index” and not directly track cryptocurrencies like traditional ETFs.

Per the filing, “The fund may, however, have indirect exposure to cryptocurrencies by virtue of its investments in companies that use one or more digital assets as part of their business activities or that hold digital assets as proprietary investments.”

Notably, the Schwab Crypto Economy Index comprises companies engaged in some or the other forms of crypto-related activities.

If the crypto economy ETF is approved, it will enable Schwab’s clients to speculate on the index without holding any asset. In other words, the ETF would offer SCHW’s clients tailored exposure to the crypto economy, though not to any digital coins.

Since the crypto ETF will be focused on equities and not directly on any digital asset, it will be able to avoid the regulatory troubles that spot products like a bitcoin ETF have to face.

Since Schwab already manages more than $7.5 trillion of assets under management (AUM), its decision to launch a crypto economy ETF does not come as a surprise or shock.

Notably, Schwab’s CEO, Walt Bettinger, has had very positive comments on cryptocurrencies.

In an interview, Bettinger said that firms such as Schwab have a void for crypto, reflecting the growing importance of digital assets in the finance sector.

Last April, Bettinger informed investors that SCHW was considering launching an ETF or other products that could bring crypto investing to a larger set of clients. He stated, “We are looking very closely and, I think, cautiously at the crypto market. We can certainly see some of the client excitement, particularly with certain segments of the market. If Charles Schwab, the company, decides to participate in the crypto market, we will be highly competitive, we will be disruptive and we will be client focused.”

Jonathan Craig, the head of Investor Services at Schwab, added, “A full 16% of Schwab’s clients plan to put money into cryptocurrencies in the first half of the year.”

Our Take

Being a leading brokerage player, Schwab has reinforced its position by strategic acquisitions, which are expected to be accretive to earnings. The company remains focused on enhancing trading revenues, which have been under pressure for the past few years. For this, it continues to undertake initiatives, including lowering its basic online equity and ETF trade commissions to zero and reducing fees for the Schwab market cap-weighted index mutual funds.

Further, it launched Schwab Stock Slices, through which investors will be able to own shares of any company in the S&P 500 Index starting at $5 each, even though these shares cost more. These efforts, aimed at building client base are likely to lead to improvement in trading income.

Over the past year, shares of SCHW have rallied 24.1%, outperforming the 1.3% growth recorded by the industry.

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Currently, Schwab carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Digital Asset Space and Rising Competition

With the latest move, Schwab joins firms like BlackRock BLK, which have been increasing exposure to the crypto markets. Per a report by Coindesk last month, BLK has already started planning to offer crypto trading services to its investor clients.

BLK, the world’s largest asset manager, wants to enter the crypto space with “client support trading and then with their own credit facility.” This means that BlackRock’s clients will be able to borrow from the investment manager by pledging crypto assets as collateral.

BlackRock, which currently manages more than $10 trillion in assets for institutions, will probably give its clients (including public pension schemes, endowments and sovereign wealth funds) access to the crypto space through its integrated investment management platform, Aladdin.

Similarly, JPMorgan Chase JPM announced recently that it would make a “strategic investment” in TRM Labs, a leader in blockchain intelligence. JPM said that it would invest in the blockchain analysis firm’s crypto compliance and risk management technology.

Last month, the Wall Street giant announced that it opened a virtual lounge named “Onyx lounge” in Decentraland (a virtual world based on blockchain technology), thus, becoming the first bank in the United States to enter the metaverse.

JPM has been undertaking other initiatives as well to expand its presence in the crypto markets. In July 2021, JPM became the first major bank in the United States to allow its financial advisors to give all its wealth-management clients access to cryptocurrency funds. Next month, it came to light that JPMorgan was offering its Private Bank wealth management customers access to an in-house passively managed bitcoin fund. JPM has even launched its own digital currency, JPM Coin.

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