More ETF Price Cutting

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I am all in favor of lower fees when it comes to investment products. Charles Schwab & Co. (my custodian) has again upped the ante in “ETF deals get even better as Schwab cuts prices in price war:”

Maybe the day will come when they will pay you to buy ETFs. That will be a great day, but don’t count on it.

Still, a price war between ETF — or exchange traded fund — providers is working in the individual investor’s favor. It is making ETF investing pretty cheap.

Schwab and Fidelity lets people buy some ETFs for free, without paying commissions — or the fee you get charged when you buy or sell a security. And Vanguard has made their full fleet of ETF’s commission-free. Now, competition is also extending to the fees you get charged day in and day out for the management of the ETF itself. Schwab announced that it has cut the fees — or expense ratios — in a handful of ETFs it has created.

For example, Schwab has cut expenses in its broad market fund from .08 percent to .06 percent and in its emerging market fund from .35 percent to .25 percent.

Fees matter. They are the one thing an investor can control and over years of investing higher fees can reduce your return by thousands of dollars. Still, as you pick ETFs remember that it’s important to have a diversified portfolio — with bonds, for example, in addition to stocks. So don’t just limit yourself to the cheapest ETFs if that means skipping the full blend of funds you need. In addition, you want funds large enough to allow you to trade in and out easily without paying higher trading costs. And you want to notice what stocks or bonds are in the funds, because those with ETFs with similar names aren’t always similar.

Here’s the fee comparison chart:

While price reductions are always a step in the right direction, do not make this your main criteria when selecting ETFs. For example, while Schwab’s S&P; 500 equivalent (SCHX) has no commission and the lowest management fee (0.08%), the average daily volume is around $6 million, which makes it suitable only for small investors. Compare that to SPY, the largest ETF in the universe with over $25 billion being traded daily.

When the markets correct, and the exit doors get crowded, you do not want to get caught holding a low volume ETF. Commissions or no commissions, slightly higher annual fees or lower ones, it does not matter; when you need to exit in a hurry based on changes in the trend, or your sell stops being triggered, only volume matters.

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