Schwab's ETF Innovation

Charles Schwab has an interesting new idea: ETFs which are commission-free for Schwab brokerage clients. Ron Rowland is enthusiastic:

Just as no-load no-transaction fee mutual funds changed the mutual fund landscape, commission-free ETFs will forever alter the way that ETFs are perceived. With this one change, nearly every argument in favor of mutual funds instead of ETFs goes away. Dollar cost averaging? No longer costly with commission-free ETFs. Small account size? Not a problem anymore.

This isn’t entirely true. There are two main costs involved when you buy or sell equities, including ETFs. One, yes, is the commission. But the other is the bid-offer spread. And if the new Schwab funds remain relatively small and illiquid, it’s still going to be a bad idea to buy them, just as it’s a bad idea to buy any ETF with less than a billion dollars or so in assets.

That said, Schwab is big enough that it should be able to get there pretty quickly. And at that point, if you’re a Schwab client, these things will look very attractive indeed.

Comments

[Alex Khande...:]

There are some advantages to no-commission trades on ETFs such as the ability for dollar cost averaging for small investors, but I would agree with the underlying problem of liquidity. Many of the newer ETFs to hit the market have low volume and high bid-ask spreads. This creates inefficient pricing and higher volatility. Volume and net assets on these ETFs need to rise before the free trade becomes more attractive.

Nov 04 02:51 PM

[SA Editor J...:]

If you look at the advertised Expense Ratios on the new Schwab funds, there's no reason all but possibly the Emerging Markets fund, which is 8 basis points more expensive than Vanguard's, won't quickly amass assets. That being said, it's probably better to let someone else take the plunge first ;-)

Nov 04 03:19 PM