Commission Free ETFs

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.

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%.

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.”

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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.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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