Schwab ETFs Just Got Better
September 26, 2012
Sometimes price markdowns are applied to substandard goods, like overripe fruit or last season’s fashions. Not so with Schwab’s ETFs.
Schwab’s 15 ETFs were already attractive as low-fee, viable investment products even before this recent fee cut.
That’s in part because they’ve already cleared the all-important hurdle of investor interest.
The ETFs from Schwab for the most part have decent assets and can be traded without excessive cost. What’s more, they deliver representative coverage of their respective target markets.
Does that mean that each Schwab fund has the highest asset base, strongest daily trading volume and tightest spread in each market segment? Or that its basket perfectly captures the market in each case?
No, but these funds are ready to step out from under the shadow of giant funds from other issuers.
Here’s a quick look at the Schwab suite along the lines of assets, tradability and exposure to the market.
Schwab launched its first of its 15 funds about three years ago in late 2009 and rolled out more in 2010 and 2011.
All of the funds have over $100 million in assets. The range is from about $1.1 billion for the Schwab U.S. Broad Market ETF (NYSESArca: SCHB) to $167 million for the Schwab International Small-Cap Equity ETF (NYSEArca: SCHC).
We’ve seen many fund closures in 2012, but in my view there’s little risk of that happening to any of these funds, judging from these solid assets under management.
Expense ratios don’t tell the full story on costs. They’re just the easiest and most obvious costs to talk about.
The cost to buy and sell the fund matters too, of course. One measure of this cost is the bid/ask spread, which is the difference between highest price someone is willing to buy and the lowest price someone is willing to sell.
The following table shows the spread as a percent—the spread in cents divided by the midpoint, which levels the playing field for $10 shares and $50 shares.
Twelve of the funds have spreads less than 8 basis points—reasonably tight, in other words. Do some competing funds have tighter spreads? Definitely yes. The point is that most of the Schwab funds have significant interest that keeps spreads decent and transaction costs low.
International funds SCHE, SCHF and especially SCHC trade at wider spreads. Using limit orders rather than market orders can help contain the trading costs with these funds.
Spreads don’t cover commissions or other fees that brokers may charge, although Schwab clients can trade the Schwab ETFs without commissions.
Spreads don’t capture all aspects of tradability—not by a long shot. But these figures show that liquidity shouldn’t be a deal breaker here for medium and long-term investors.
Schwab funds track indexes in three broad flavors: Dow Jones for U.S. equities, FTSE for international equities and Barclays for bonds.
I won’t delve deeply into these here. The choice of indexes affects performance without a doubt, and some investors may feel less comfortable with the equity indexes than, say, the S&P 500 for U.S. coverage and MSCI’s EAFE for international equities.
In all, Schwab funds track well-known indexes that aim at neutral coverage—plain vanilla in other words—with pros and cons relative to their peers.
The big picture takeaway: Solid coverage with low-in costs means that the ETFs in the Schwab family are worth serious consideration for medium- and long-term investors. Short-term investors and traders who demand liquidity above all else will likely do better with the high-volume giants from other issuers.
At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Britt at firstname.lastname@example.org.