Schwab Puts Nail into Mutual Funds’ Coffin

Charles Schwab knocked down one of the last barriers mutual funds held over ETFs, commission free trading, with the launch of its new family of ETFs on Monday.

That’s right. Free!

Previously free was the sole province of the no-load fund, mutual funds that refuse to charge investors a commission to buy or sell their shares. ETFs, because they trade on the stock exchange, require investors to buy and sell shares through a registered stockbroker. And if there’s one thing you can say about stockbrokers, they don’t trade for free. That means every time an investor wants to buy and sell ETF shares, she needs to pay a commission. While discount brokers have reduced the commission to below $20 a trade, this remains a significant fee for small investors following a dollar-cost averaging schedule.

Until now that is.

Open up an account with Schwab and you can trade any of the new Schwab ETFs for free. The catch? Only the new Schwab ETFs trade for free and only when you buy online. Want to buy online an ETF from another company in your Schwab account? That commission starts at at 12.95. Still, it’s a big deal and it will make a big difference for small investors who either day trade or use a dollar-cost averaging strategy.

Dollar-cost averaging is the strategy of investing a steady amount of money into the stock market on a regular basis, such as weekly, monthly or quarterly. The strategy holds two purposes. One, it forces you to save money and invest it on a regular basis. Second, it’s a form or risk management that averages your cost basis. If you had $50,000, and you wanted to put it into the stock market, you could put it all in a variety of investment vehicles in one day. The big risk is that the market falls soon afterward, providing you with an opportunity to have bought even more at a cheaper price. By investing say $1,000 a week, you can average out the year’s volatility and make it work for you.

If the share price falls, because you didn’t put it all in at once, you get an opportunity to buy at a lower price, and get more shares. If the share price rises, you do get less than you would have earlier, but you’re making a profit, your shares are rising.

Realizing investors want to put their feet back into the market, but have lost a taste for niche portfolios; Schwab has created eight conservative, broad-based ETFs to grab the widest audience.

· Schwab U.S. Broad Market ETF (SCHB) – this tracks the Dow Jones U.S. Broad Stock Market Index, a market-cap weighted benchmark that contains the 2,500 largest stocks in the U.S. market. This provides a comparable index for people who want to track the Russell 3000. The expense ratio is 0.08%, which comes in one basis point lower than the Vanguard’s Total Stock Market ETF (VTI) and less than half the 0.21% charged by the iShares Russell 3000 Index (IWV).

· Schwab U.S. Large-Cap ETF (SCHX), which follows the DJ U.S. Large-Cap Total Market Index, a cap-weighted index of the 750 largest U.S. companies. This is Schwab’s alternative to the S&P 500 Index. It also charges 0.08%, compared with 0.09% on the SPDR.

· Schwab U.S. Small-Cap ETF (SCHA). This follows the DJ U.S. SmallCap Total Stock Market Index, the 1750 members of the DJ U.S. Broad Market Index not included in the large-cap index above. This would be analogous to the Russell 2000 small-cap index.

· Schwab International Equity ETF (SCHF). The tracks an index by FTSE, the people who made the benchmark for the British stock market. The FTSE Developed ex-US Index holds about 85% large-cap stocks and 15% small-cap from more than 20 developed markets outside the U.S. It charges an expense ratio of 0.15%.

By the end of the year, Schwab expects to launch four more ETFs to track large-cap growth, large-cap value, international small-cap and emerging markets.

The no-load ETF appears to be part of Schwab’s broader strategy to become the lowest-cost provider in the ETF space. In addition to no commissions, the Schwab ETFs either beat or match the expense ratios of its nearest competitors, making them the lowest priced ETFs on the market.

This follows Schwab’s move in May to lower the expense ratios on all its no-load equity index funds with a minimum investment of $100. At the time Schwab lowered the expense ratio on its Schwab S&P 500 Index Fund to nine basis points, the same charge as the SPDR and half the cost of the Vanguard 500 Index fund, the benchmark for low cost index funds.

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One response to “Schwab Puts Nail into Mutual Funds’ Coffin

  1. This is a big plus for Schwab.

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