Commission Free ETFs

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Charles Schwab Corp. has finally entered the crowded Exchange Traded Fund arena as MarketWatch reports in “Schwab lists first ETFs:”

The financial-services giant, which boasts nearly 8 million brokerage accounts, listed four ETFs on the NYSE Arca exchange. The ETFs, which are baskets of securities that trade like individual stocks, feature low fees and represent a clear challenge to industry heavyweights State Street Corp., Vanguard Group and Barclays Global Investors, which is being acquired by BlackRock Inc.

Schwab is trying to jumpstart its ETF business by offering commission-free online trades for its clients.

Peter Crawford, senior vice president at Schwab, in a telephone interview Tuesday said the ETFs’ low expense ratios and free trading offer “an incredible price” for investors. Schwab, which has about $1.3 trillion in client assets, will benefit from its strength as a mainline distributor of financial products, he said.
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The inaugural Schwab ETFs that listed Tuesday are Schwab U.S. Broad Market ETF (SCHB) , Schwab U.S. Large-Cap ETF (SCHX 24.82) , Schwab U.S. Small-Cap ETF (SCHA) and Schwab International Equity ETF(SCHF) . The first two have expense ratios of 0.08%, while the others charge 0.15%.

They undercut similar ETFs on price, and any pressure on competitors to cut fees is a welcome development for investors, experts say.

For example, the largest ETF, State Street’s SPDR S&P; 500 ETF (SPY) , has an expense ratio of 0.09%, as does the iShares S&P; 500 Index Fund (IVV). The Vanguard Large-Cap ETF levies fees of 0.13%.
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Crawford, the Schwab executive, said the firm’s ETF push will be helped by its client relationships, particularly its network of about 6,000 independent advisers. Even before it launched its own ETFs, Schwab was a major trading platform for the products and the company estimates between 20% and 25% of retail ETF assets are held by Schwab clients.

The company plans to roll out four more broad-based stock ETFs next month, tracking U.S. large-cap growth, U.S. large-cap value, international small-caps and emerging markets. The tracking indexes are maintained by Dow Jones and FTSE.

Crawford declined to comment on specific plans for additional Schwab ETFs, citing regulatory restrictions. However, he said the company will focus on “the major categories, which account for the bulk of assets,” rather than niche products.

“There’s nothing fancy about the new Schwab ETFs,” said Gabriel, the analyst. There are already a “plethora” of similar funds on the market, so Schwab will compete head-to-head with industry leaders BGI, State Street and Vanguard.

“With little differentiation among ETFs offering similar exposures, Schwab’s strong brand name and its product pricing will be critical to the firm’s success in the budding ETF industry,” Gabriel wrote in a recent Morningstar commentary.

“Investors should welcome Schwab’s entrance into the ETF universe,” he added. “While there’s nothing earth-shattering about the exposures offered by the new Schwab ETFs, the relatively low expenses that Schwab plans to charge should at least keep the big boys in the industry honest.”

[Emphasis added]

I always welcome new products in the ETF marketplace, especially when they are being introduced with lower costs to investors. Even though, I use Charles Schwab & Co. as custodian for my clients’ assets, I will not immediately jump at these new offerings.

My reasoning is the same for all newly created ETFs. I want to see price history for some 6-9 months so that I can better evaluate the trend. At the same time, I want to make sure that enough interest has been created so that the volume has increased to acceptable levels.

To invest in any unproven ETF with low volume is simply asking for trouble. The bid/ask spreads are high, and you may not be able to liquidate your holdings quickly without too much slippage in price.

In other words, you are giving up control, which is something we as trend followers try to avoid.

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Comments 12

  2. Okay, this seems to good to be true. And I'm not sure why you wouldn't jump onto this ETFs.

    I'm assuming these ETFs follow indices. I'm sure Schwab has the muscle and resources to do a good job of tracking the underlying indices like say Vanguard does.

    Expenses are low and most important, NO COMMISSIONS! This is heaven for traders and especially those who follow your work Uli. Right? Why will I buy a mutual fund and risk paying early redemption fees imposed by the fund company itself or the brokerage where I buy the fund?

    Seems to me the next best thing since sliced bread. Unless I'm missing something.

  3. Ulli,

    We all, my husband and two Sons, used to have all our accounts at Charles Schwab, but several years ago they started tacking on fees and had such long holding periods on mutual funds in order to avoid redemption fees etc., that we all pulled our money, which was substantial by the way out and moved to Scottrade. Moving to Scottrade has been a very good move. I wouldn't trust Schwab with my money again as they change their policies too often. Who knows what will happen after lots of people give them their accounts so they can trade those ETFs for free. Maybe they will eventually tack on trading fees, that would be my guess or at least add some type of fee somewhere.

  5. Melagros,

    I have used Schwab since 1993 on the institutional side with no complaints whatsoever. There was a time where some changes were made on the retail side, which were questionable. I believe that the management changes have put the company in the right direction again, as an innovator and not a follower.

    Ulli…

  6. Still Schwab charges early redumption fee of $49 for mutual funds which is very high. also their retail brojerage of $12 /transaction is also high.
    Use Thinkorswim or Sogoinvest like brokerage for ETFs.
    It is possible to Dollar cost average DCA with ETFs. What I do is invest $1000 in ETF at a time. Pay $3 comission for brokerage Which is 0.3% ONLY ONCE. unlike mutual funds charge 0.5-2.0% expense ratios Annually and other unknown fees…

  7. I have used Scottrade for years and I like that the fees are low, there is more than enough no-load funds and ETFs, the interface is easy after a bit of getting used to, trades are always fast, and there is a branch office nearby. They recently have made it easy to move cash in and out of Scottrade. Before I had to drop off a check, but can now do instant transfers. I've never used Schwab, so have no opinion, but do like Scottrade.

  8. Ulli,

    I don't like all of Chuck Schwab's fees and what the previous person called redumption fees, which are very high with Schwab and only $17 at Scottrade, which is my favorite, never had any problems with them, but really got whacked with fees at Schwab till I wised up and moved money to Scottrade. ETFs are only $7 per trade, market or limit still $7. Chuck may have screwed himself when he started playing games with the little guy, which to me looked like he didn't care about us at all, well I don't care about Schwab anymore either. He certainly won't get me back, free ETF trades or not.

  9. Ulli,

    I liked Schwab years ago before they started adding on more fees and had such long holding periods to beat the redemption fees. Also they had an office reasonably close to "The Villiages" in central Florida, then closed it. They later opened a small office almost in "The Villages" and I stopped by one day and the person that I met with was not very helpful at and acted like a know it all and anything I said or asked about was appeared to be wasted time. He kept pointing out stuff on material that they had printed up to hand out at group meeting that was cute and colorful, but had not much to do with trend timing or investment decisions as it was all confusing and caused one to have to rely on them to make sense of it etc. I finally had all I could take of this guy and left very unhappy and left all my account at Scottrade. They have a long way to go to beat Scottrade in my opinion. Their free trades on their ETFs don't excite me much.

  10. Read Ulli's reply about Schwab correcting their retail fees. They did the wrong things a few years ago but Chuck reversed most of them. Still, their $12.95 commission is high. Only way to get it down is trade more or have a high account balance. Multiple linked accounts is a negotiation point. Commission is where Scottrade has the advantage. I have acccounts at both Schwab and Scottrade so I know the differences. I started with Schwab with my company 401K. Both have their strong and weak points. I have had good experiences with both when asking for help. I don't use either for investment advice since I have other resources. Thank-you Ulli. I like the Key Fob for login security with Schwab that Scottrade was supposed to start a few years ago and may still have plans for. The Scottrade new Bank sweep option is good. Schwab has a Treasury sweep but it is closed to new accounts (try negotiation). Schwab does have NTF Mutual Funds that do not have a short-term redemption fee (ie ProFunds). The one issue I have with Scottrade is the addition of short term redemption fees a few years ago. If I need professional help and decide to go with Ulli, my Schwab accounts are already established so there is no delay or hassle. Transferring funds between Brokers is easy. This is not a recommendation for either Broker. It's not a bad idea to have your funds with more than one Broker.

  11. Ulli,

    I like your free service, thanks. What do you consider a good daily volume number in an ETF after it proves itself for 6-9 months as you mentioned about the Chuck Schwab's new ETFs?

    Thanks

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