Schwab Declares Price War With ETF Fee Cuts
June 14, 2010
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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, particularly Vanguard.
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 interest.
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 blog.
“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 said.
The new prices on the funds are as follows: