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ETF Fees: Competition is a Good Thing


The so-called fee war in the exchange traded fund space has helped slash annual investment costs on a number of fund products, and it looks like it is paying off for both providers and investors.

Last September, Charles Schwab reduced its fees on a number of funds, including the Schwab U.S. Broad Market ETF (SCHB) , to 0.04%, the lowest on the market, from the original 0.06% expense ratio, writes Eric Balchunas for Bloomberg. [Charles Schwab Grabs for ETF Market Share]

Since then, the SCHB ETF has doubled in size to $2 billion in assets under management. Additionally, the Schwab U.S. Large-Cap ETF (SCHX) , which also comes with a 0.04% expense ratio, added $400 million in assets, a 40% gain.

Originally, Vanguard began the low-cost investment theme with its patented line of index mutual funds and ETFs. However, Schwab has tried to undercut the competition as a loss leader to attract investors onto its own brokerage platform.

Disregarding the low fee aspect for a moment, SCHB as an investment provides a diversified exposure to 1,956 U.S. stocks, covering all major sectors, with a tilt toward large-cap stocks.

Nevertheless, the Vanguard Stock Market ETF (VTI) , with $31 billion in assets, has overshadowed SCHB. VTI has a 0.06% expense ratio, exposure to 3,183 stock components and attracted $4.5 billion since last September, a 17% increase.

On top of the lower explicit cost associated with the annual expense fees, investors have also benefited from the increased liquidity due to SCHB’s larger size, which translated to tighter bid/ask spreads, as well as the commission free trades on the Schwab platform. [The Total Cost of Owning an ETF]

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.