Yield of Dreams

Checkmate Schwab: ETF Prices Go Even Lower

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Today Schwab announced fee reductions on all 15 of its ETFs, begging the question, who’s next? And how low can fees go?

How low will ETF fees go? Today, they just a little lower, with Charles Schwab announcing today that it has reduced fees on all 15 of its proprietary ETFs. During a conference call this morning, Schwab said it lowered prices by 25 to 60 percent on its ETFs, bring its weighted average price of its entire line-up to 7.7 basis points.

The expense ratio on Schwab’s largest fund, the Schwab U.S. Broad Market ETF (ticker: SCHB), dropped from 6 basis points to 4 basis points. According to Marie Chandoha, president of Charles Schwab Investment Management, the price reductions make them the lowest expense ratios in their funds’ respective Lipper categories.

“Last time I checked, low fees on index products were pretty great for investors,” said Walt Bettinger, CEO of Schwab. “This is a period of great uncertainty in the markets. We all know that. We also all know that the one certainty when you invest is expenses. And we know that expenses detract from returns.”

Schwab burst onto the ETF scene in November 2009, a move that shook up the prevailing order and altered the asset management industry at large. Lots of investors wanted to talk to Chuck. Why? Lower fees. That fall, Schwab launched four funds with fees well below market rates, undercutting some of the biggest players in the space, including iShares, Vanguard and State Street Global Advisors. The price war was in full swing.

But the announcement today proves that Schwab was just warming up. When asked whether he was perpetuating the price wars, Bettinger responded, “I don’t think there’s any denying that the ETF market is competitive. We’re simply making investing in ETFs better. Might others copy it? Sure, they might.”

He added later on, “The operating expense reductions that we’re talking about today are not a temporary marketing strategy. They’re not in response to something that someone else said or projected that they might do. These were approved by the trustees of our ETF board last summer.”

Chandoha said she would not speculate on how low Schwab’s fees could go in the future; she did say that the firm was committed to offering clients the lowest fees for market-cap weighted ETFs. “So I’ll leave it to your imagination as to how we might respond to followers late to the game who might attempt to undercut our exceptional pricing.”

Bettinger seemed to dodge questions about how Schwab would make money on the low fees, comparing it to asking Apple if they make money on the glass screen of an iPhone.  “For them, it’s about making money on the whole phone,” he said.

In the same way, Bettinger said, Schwab is focused on the entirety of its client relationships, hoping that customers will develop an affinity for Schwab offerings. 

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