Charles Schwab, the discount broker that began rolling out its
own exchange-traded funds in November, has cut expense ratios on
six of its eight ETFs, including its emerging markets offering,
raising the stakes in its competition with other fund purveyors,
In its press release announcing the price cuts, Schwab went out
of its way to show how its new costs measure up against the top
three U.S. ETF firms, iShares, State Street Global Advisors and
Vanguard, respectively. It said in the release that its fees are
now lower than those on any competing funds.
The comparison to Vanguard is particularly apt because all six
of Schwab's price cuts make its ETFs cheaper than similar funds
from Vanguard, a firm long associated with affordable prices.
Moreover, Schwab and Vanguard have each offered their clients free
trading on their respective ETFs, lending Schwab's price cuts an
aspect of a brewing price war between it and Vanguard.
"To have the lowest price, we have to be lower than Vanguard,"
Peter Crawford, a Schwab executive in charge of investment
management services, said in a telephone interview. "With ETFs it's
about getting to scale," Crawford added in response to a question
about whether such low prices might not be in Schwab's
While acknowledging that Schwab's move was akin to "paying it
forward," Crawford declined to estimate a level of assets when its
ETFs would no longer have the appearance of being little more than
loss leaders. Whatever challenges Schwab faces, there's a lot for
investors to like in all this, as Matt Hougan said in his
"We feel very confident given the first six or seven months of
our launch that we've achieved some level of scale, and we feel
confident we'll get to the next level of scale," he added.
Schwab's entrance into the world of proprietary ETFs has so far
been successful. The San Francisco-based company's ETFs have
gathered more than $1 billion since it rolled out its first funds
in November. Also, the company said in April that its ETF-based
advisory program it launched this year had collected more than $500
million in assets.
The Price Cuts
The most conspicuous price cut is on the Schwab Emerging Markets
Equity ETF (NYSEArca:SCHE). Schwab sliced the expense ratio on SCHE
to 0.25 percent a year from 0.35 percent previously, 2 basis points
lower than the 0.27 percent fee Vanguard charges on its MSCI
Emerging Markets ETF (NYSEArca:VWO).
VWO had ongoing success attracting assets, in part because of
its relatively low cost. The Vanguard fund, now the fifth-largest
U.S. ETF, is steadily catching up to iShares MSCI Emerging Markets
Index Fund (NYSEArca:EEM). EEM is the biggest U.S. emerging markets
fund and was the third-biggest of all U.S. funds at the end of May,
according to data compiled by IndexUniverse.com.
Expense ratios on all of Schwab's funds were already lower than
costs of competing funds from iShares and SSgA, the company
The new prices on the funds are as follows:
- The Schwab U.S. Broad Market ETF (NYSEArca:SCHB) will now
cost investors 0.06 percent, compared with 0.08 percent before
and 0.07 percent for Vanguard's "VTI;"
- The Schwab U.S. Large-Cap Growth ETF (NYSEArca:SCHG) now
costs 0.13 percent compared with 0.15 cent previously and 0.14
percent for Vanguard's "VUG;"
- The Schwab U.S. Large-Cap Value ETF (NYSEArca:SCHV) now costs
0.13 percent compared with 0.15 percent previously and 0.14
percent for Vanguard's "VTV;"
- The Schwab U.S. Small-Cap (NYSEArca:SCHA) now costs 0.13
percent compared with 0.15 percent previously and 0.14 percent
for Vanguard's "VB;"
- The Schwab International Equity ETF (NYSEArca:SCHF) now costs
0.13 percent compared with 0.15 cent previously and 0.15 percent
for Vanguard's "SCHF."
Context Is Critical
Schwab left unchanged the price of its U.S. Large Cap Fund at
0.08 percent, which was already undercutting its competition,
notably the SPDRs S&P 500 ETF (NYSEArca:SPY), the world's
biggest exchange-traded fund. SPY, which costs 0.09 percent, had
about $70 billion in assets at the end of May, according to the
IndexUniverse.com data on May ETF flows.
The company also left alone the price of its International
Small-Cap Equity ETF (NYSEArca:SCHC) at 0.35 percent.
All the prices are definitive, and would require shareholder
approval to be undone, Crawford said. That's different than, for
example, a recent price on an emerging market fund by Old Mutual, a
South Africa-based money management firm. The company recently cut
the fee on its GlobalShares FTSE Emerging Markets Fund
(NYSEArca:GSR) to 0.25 percent, from 0.39 percent, saying the
teaser rate was good for a year, and could be extended if assets
start flowing in.
Crawford said it's important to understand Schwab's
price-cutting plan move in the context of the company's broader
place in the money management industry. It's long been a champion
of delivering relatively inexpensive services, and it can afford to
do so, in part because it's been successful attracting assets.
It now houses about $1.4 trillion in assets, $200 billion of
which is in its own mutual funds. That means its ETFs, which again
have attracted just over $1 billion since the rollout began in
November, are a relatively small piece of its overall business.
"At Schwab, our approach is about the totality of our
relationship with our clients. If we provide them with an
exceptional value across the board in all these different products,
they'll bring us more of their business and they'll tell their
"That's a strategy that helped us bring in $85 billion last year
in net new assets last year, and it continues with strong growth
this year. So we do expect these [ETF] products to be profitable
and not a loss leader. At the same time, at Schwab, it's always
been about more than product profitability."
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