Charles Schwab (SCHW) on Thursday commenced a new platform that will allow investors to trade over 100 ETFs commission-free. The move will transform the dynamics of the $1.4 trillion U.S. ETF business and harkens back to Schwab two decades ago launching the no-transaction-fee mutual fund supermarket, OneSource.
The San Francisco-based financial services firm said starting Thursday, Schwab clients can buy and sell 105 ETFs with zero online trade commissions. The platform, called Schwab ETF OneSource, includes funds managed by State Street (STT), Guggenheim, Invesco PowerShares, ETF Securities, U.S. Commodity Funds and Schwab's own lineup of ETFs.
"Just as Schwab Mutual Fund OneSource changed the landscape for investors and advisors by providing convenient, affordable access to leading mutual funds when Chuck Schwab introduced it twenty years ago, we believe Schwab ETF OneSource will deliver enormous benefit and change the way our clients buy and sell ETFs," said Walt Bettinger, Schwab's chief executive.
"It is a seminal moment," said Peter Crawford, senior vice president of Charles Schwab, in a telephone interview.
Crawford noted that many investors dollar-cost-average, or contribute small amounts to funds over time. The commission-free service will dramatically lower the cost of using ETFs for these investors. The platform will also make ETFs more attractive to financial advisors who are increasingly using the low-cost investment products in place of mutual funds and individual stocks.
'Growing part of the retail and advisor business'
Schwab is the largest ETF custodian. It oversees its own family of ETFs and also acquired Windhaven Intvestment Management, which develops and creates prepackaged ETF portfolios for advisors and investors.
ETFs are "a growing part of the retail and advisor business," said Beth Flynn, vice president of Schwab ETF Platform Management, adding that they accounted for $18 billion of the firm's $120 billion of total inflows last year.
Schwab has also developed services to educate investors on how ETFs work.
"We're not saying ETFs are better than mutual funds," said Crawford. Rather, Schwab wants to create the experience of buying ETFs similar to what it did with mutual funds with OneSource.
Schwab ETF OneSource includes funds tracking U.S. stocks, international equities, bonds, sectors, currencies, commodities and real estate. For example, domestic equity ETFs included on the platform include Schwab U.S. Broad Market (SCHB), Guggenheim S&P 500 Equal Weight (RSP), PowerShares S&P 500 Low Volatility (SPLV) and SPDR S&P 600 Small Cap Growth (SLYG).
Some large and popular ETFs not included in Schwab ETF OneSource include SPDR S&P 500 (SPY), PowerShares QQQ (QQQ) and SPDR Gold Shares (GLD). However, partners may continue to add ETFs over time, said Flynn.
'Challenging the status quo'
"Today's investors, and the advisors who serve them, want sophisticated, low-cost strategies and more control over their investment choices and outcomes. By working with these leading ETF managers to offer the largest selection, we've created a new home for clients to buy and sell ETFs that is an important complement to the tools and resources we offer to help them achieve their goals," said Schwab CEO Bettinger.
"Awareness and popularity of ETFs have been growing steadily across the range of investors and advisors. Whether there is interest in broad-based exposure to equity markets, access to a single asset class, or a specific fund that seeks to reduce volatility - Schwab ETF OneSource offers a solution - and we're helping investors put more of their money to work for them," he added. "It's another example of Schwab challenging the status quo to bring greater value to our clients."
The platform is "straightforward for clients to use," notes Flynn. "There are no catches like the need to enroll or a short term redemption fee which are found at other firms. All Schwab clients will automatically receive $0 commission online trades for OneSource ETFs. And they can trade them as and when they like with no penalty for holding the position for less than 30 days."
'Simple and affordable'
The online broker on Thursday also rolled out the Schwab ETF Portfolio Builder designed for investors who want to construct all-ETF portfolios. The service covers varying risk profiles and currently features eight commission-free ETFs managed by Schwab and other providers. The new tool "makes it simple and affordable to build a well-diversified portfolio," Schwab said.
The firm had $152 billion of ETF assets custodied on its platform at the end of 2012. Schwab also managed $8.6 billion of assets in its ETFs, which can be traded commission-free by clients.
In December, a report surfaced that Schwab was considering a commission-free ETF service for clients. However, Reuters reported a sticking point was a marketing fee that ETF providers said was too high.
Schwab declined to share specific percentages and dollar amounts related to the economics of ETF OneSource, but noted ETF providers are compensating Schwab for shareholder services. There is a fixed component based on the number of ETFs that are included from each outside provider on the platform. There is also a variable component based on inflows to particular ETFs. Schwab is also making an investment in building up the platform's infrastructure, education and marketing support.
Bettinger emphasized that Schwab clients who buy ETFs online through Schwab ETF OneSource will pay exactly the same operating expense ratios they would elsewhere, but without paying a commission.
Schwab executives also stressed that ETF OneSource isn't a "gimmick" and that the firm is committed to the platform for the long term.
The financial giant already lets its customers trade its own ETFs commission-free, and some ETF providers have similar arrangements with online brokers. But Schwab is the first to create a commission-free ETF supermarket with funds from multiple firms.
Full disclosure: Tom Lydon's clients own SPY, QQQ and GLD.
Additional disclosure: Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates.