By Matt Hougan
) decision to cut prices on its ETFs is not about ETFs at all. In
fact, Schwab's entire ETF effort isn't really about ETFs.
Olivier Ludwig wrote
on IndexUniverse.com, Charles Schwab has cut fees on six of its
eight ETFs to ensure that all of them are the lowest-priced funds
on the market.
I'll go further than that. As far as I know, the Schwab U.S.
Broad Market ETF (
) is now the lowest-price retail mutual fund in the world, charging
just 0.06 percent in annual expenses. When you consider the fact
you can buy the fund with zero commissions
, it's quite a deal.
Earlier today, the director of research at IndexUniverse.com,
Dave Nadig, asked me bluntly if investors should really care about
funds priced at 6 vs. 7 basis points. The obvious answer is no. As
Dave said, "All else being equal, expense ratios matter, but all
else is never equal." Index management processes, dividend
reinvestment policies, securities lending arrangements and a dozen
other factors all impact the return of a portfolio more than a
single basis point in expenses.
Still, you can't deny the gut appeal of getting the cheapest
mutual fund in the world. And that, I think, is the point.
Schwab hopes the price cut will grab market attention, letting
it grab hold of the ETF revolution's coattails and pull in some new
And that's what it's all about: accounts. Schwab Senior Vice
President for Investment Management Services Peter Crawford told
Olly that he plans for Schwab's ETFs to achieve sufficient scale to
be profitable. But the profitability of the ETFs themselves is
clearly not a focus for Schwab. With a median expense ratio of 0.13
percent, Schwab could pull in $10 billion and still earn just $13
million in fees. Even if Schwab absolutely blows the doors off and
gathers $100 billion in assets, it's pulling in just $130 million
in revenues from the expense fees. For a company with just over $4
billion in revenues in 2009, that would mean its ETFs would be
making up a whopping 3.3 percent of the total.
But that's not what this is about. This is about using ETFs to
open the doors to new customers. It's the same as spending money to
put a talking baby in a Super Bowl ad.
The good news is that these aren't Super Bowl ads, which at best
give you a small chuckle. These are ETFs that give you full global
exposure for 25 basis points or less.
Should fees be the only thing you consider when you buy an ETF?
Of course not.
But low fees certainly help.
Friday's ETF to Watch: iPath VIX Short-Term