Charles Schwab, the discount broker known for its low-cost ETFs, took the battle in fees to its arch rival Vanguard by cutting prices on all 15 of its ETFs ranging from 25 percent to 60 percent, resulting in each of the ETFs being cheapest in their respective Lipper categories.
As an example, the Schwab U.S. Broad Market (SCHB) will now cost 0.04 percent, compared with its previous expense ratio of 0.06 percent.
Company officials said the moves, which became effective late yesterday, brought the weighted average overall expense ratio of its ETFs down to 0.077 percent.
"We're not going to stop here," Walt Bettinger, president and chief executive officer of San Francisco-based Charles Schwab, said in a monthly telephone conference with journalists. He stressed the price cuts weren't a temporary measure.
“It’s good for them and it’s good for Schwab,” Bettinger said in response to a Schwab colleague as to whether the company was making money on its ETFs. “What we’re doing today for investors is great.”
Where it all stops, no one knows, but some of our ETF analysts here at IndexUniverse suspect Schwab’s bigger plan is to attract more clients and financial advisors to its overall platform, and once they have arrived, hope they make use of Schwab products and services that are more expensive than its low-cost ETFs that can also be traded commission free by Schwab clients.
The move raises the bar on Vanguard, whose whole reputation rests on its low-costs funds. What Vanguard chooses to do remains to be seen. It’s clear that Schwab’s low-cost strategy is working every bit as well as it is for Vanguard. Schwab, which launched its first ETFs in November 2009, had $6.33 billion in 15 separate ETF assets as of Sept. 20, 2012, according to data compiled by IndexUniverse.
An official at Vanguard, predictably, said the Valley Forge, Pa.-based firm doesn’t view the battle for lowest-in-class as a battle at all. Rather, it stresses that as a mutually owned mutual fund company, it runs its funds at cost, and that the trend at Vanguard to lower costs is an ongoing process that reflects improving economies of scale. Translation? Don’t hold your breath, but lower Vanguard fees will probably materialize sooner or later, especially given the strong inflows into its ETFs.
In any case, according to regulatory paperwork the company filed on the price cuts, it made the following changes:
- Schwab U.S. Broad Market (SCHB), now 0.04 percent from 0.06 percent
- Schwab U.S. Large Cap (SCHX), now 0.04 percent from 0.08 percent
- Schwab U.S. Large Cap Growth (NYSEArca:(SCHG), now 0.07 percent from 0.13 percent
- Schwab U.S. Large Cap Value (SCHV), now 0.07 percent from 0.13 percent
- Schwab U.S. Mid Cap (SCHM), now 0.07 percent from 0.13 percent
- Schwab U.S. Small Cap (SCHA), now 0.10 percent from 0.13 percent
- Schwab U.S. Dividend Equity (SCHD), now 0.07 percent from 0.17 percent
- Schwab International Equity (SCHF), now 0.09 percent from 0.13 percent
- Schwab International Small Cap Equity (SCHC), now 0.20 percent from 0.35 percent
- Schwab Emerging Markets Equity (SCHE), now 0.15 percent from 0.25 percent
- Schwab U.S. TIPS (SCHP), now 0.07 percent from 0.14 percent
- Schwab Short-Term U.S. Treasury (SCHO), now 0.08 percent from 0.12 percent
- Schwab Intermediate-Term U.S. Treasury (SCHR), now 0.10 percent from 0.12 percent
- Schwab U.S. Aggregate Bond (SCHZ), now 0.05 percent from 0.10 percent
- Schwab U.S. REIT (SCHH), now 0.07 percent from 0.13 percent
“We’ve been able to enable these price cuts by the great growth we’ve seen in the category, and the scale we’re able to bring to it. And we’re passing those savings on to clients,” Marie Chandoha, president of Charles Schwab Investment Management, said in the conference call.
Total U.S.-listed ETF assets are now $1.309 trillion , just shy of a record, according to data compiled by IndexUniverse.
Schwab has about 0.5 percent of those assets and is the No. 10 U.S. ETF provider.
Race To The Bottom?
Many sources inside the fund industry are wondering whether the price war that is taking place in the ETF industry is really good for money management firms, especially those that are public.
Pressed on this question by IndexUniverse, Bettinger reaffirmed his company’s driving interest to do what's best for its clients.
“I’ll reinforce what I’ve already said:It’s like asking Apple if they can make money on glass on an iPhone,” Bettinger said. “I’m not worried about the manufacturer of the glass that goes on the iPhone. If I’m running Apple, I’m worried about building a client base that loves Apple products.
“At Schwab, we’re not worried about the individual who manufactures ETFs for the firm; we’re worried about delighting investors and building our franchise,” the CEO said. “We’re about serving clients, and different products that have different levels of profitability.”
That latter point may be crucial, according to IndexUniverse ETF Analyst Paul Baiocchi, who said Schwab may be interested in attracting new clients with its too-good-to-pass-up ETFs, but will charge more for some of the firm’s other services once those new clients come forth.
“The lower expense ratios are designed to get retail investors to move their assets to Schwab; buy these vanilla strategies and then use the Schwab platform to allocate to all the strategies that the Schwab ETF lineup does not cover,” Baiocchi said.
“In a similar way, they’re trying to attract advisors who are looking to decrease overhead in the management of their portfolios. Many of these advisors use the vanilla funds as part of their overall strategy, and the advisors who are more tactical in other portions of their portfolios can then pay commissions and fees that Schwab charges them to invest in those other products,” Baiocchi added.
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