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
As an example, the Schwab U.S. Broad Market (NYSEArca:SCHB) will
now cost 0.04 percent, compared with its previous expense ratio of
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
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
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 (NYSEArca:SCHB), now 0.04 percent
from 0.06 percent
- Schwab U.S. Large Cap (NYSEArca:SCHX), now 0.04 percent from
- Schwab U.S. Large Cap Growth (NYSEArca:(
), now 0.07 percent from 0.13 percent
- Schwab U.S. Large Cap Value (NYSEArca:SCHV), now 0.07 percent
from 0.13 percent
- Schwab U.S. Mid Cap (NYSEArca:SCHM), now 0.07 percent
from 0.13 percent
- Schwab U.S. Small Cap (NYSEArca:SCHA), now 0.10 percent from
- Schwab U.S. Dividend Equity (NYSEArca:SCHD), now 0.07 percent
from 0.17 percent
- Schwab International Equity (NYSEArca:SCHF), now 0.09 percent
from 0.13 percent
- Schwab International Small Cap Equity (NYSEArca:SCHC), now
0.20 percent from 0.35 percent
- Schwab Emerging Markets Equity (NYSEArca:SCHE), now 0.15
percent from 0.25 percent
- Schwab U.S. TIPS (NYSEArca:SCHP), now 0.07 percent from 0.14
- Schwab Short-Term U.S. Treasury (NYSEArca:SCHO), now 0.08
percent from 0.12 percent
- Schwab Intermediate-Term U.S. Treasury (NYSEArca:SCHR), now
0.10 percent from 0.12 percent
- Schwab U.S. Aggregate Bond (NYSEArca:SCHZ), now 0.05 percent
from 0.10 percent
- Schwab U.S. REIT (NYSEArca:SCHH), now 0.07 percent from
"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
"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
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
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