Schwab's Low Fees Are Not About ETFs

 |  About: The Charles Schwab Corporation (SCHW), Includes: SCHA, SCHB, SCHC, SCHE, SCHF, SCHG, SCHV, SCHX
by: IndexUniverse

By Matt Hougan

Schwab’s (NYSE:SCHW) decision to cut prices on its ETFs is not about ETFs at all. In fact, Schwab’s entire ETF effort isn’t really about ETFs.

As Olivier Ludwig wrote on, Charles Schwab has cut fees on six of its eight ETFs to ensure that all of them are the lowest-priced funds on the market.

I’ll go further than that. As far as I know, the Schwab U.S. Broad Market ETF (NYSEARCA:SCHB) is now the lowest-price retail mutual fund in the world, charging just 0.06 percent in annual expenses. When you consider the fact that you can buy the fund with zero commissions, it’s quite a deal.

Earlier today, the director of research at, Dave Nadig, asked me bluntly if investors should really care about funds priced at 6 vs. 7 basis points. The obvious answer is no. As Dave said, “All else being equal, expense ratios matter, but all else is never equal.” Index management processes, dividend reinvestment policies, securities lending arrangements and a dozen other factors all impact the return of a portfolio more than a single basis point in expenses.

Still, you can’t deny the gut appeal of getting the cheapest mutual fund in the world. And that, I think, is the point.

Schwab hopes the price cut will grab market attention, letting it grab hold of the ETF revolution’s coattails and pull in some new accounts.

And that’s what it’s all about: accounts. Schwab Senior Vice President for Investment Management Services Peter Crawford told Olly that he plans for Schwab’s ETFs to achieve sufficient scale to be profitable. But the profitability of the ETFs themselves is clearly not a focus for Schwab. With a median expense ratio of 0.13 percent, Schwab could pull in $10 billion and still earn just $13 million in fees. Even if Schwab absolutely blows the doors off and gathers $100 billion in assets, it’s pulling in just $130 million in revenues from the expense fees. For a company with just over $4 billion in revenues in 2009, that would mean its ETFs would be making up a whopping 3.3 percent of the total.

But that’s not what this is about. This is about using ETFs to open the doors to new customers. It’s the same as spending money to put a talking baby in a Super Bowl ad.

The good news is that these aren’t Super Bowl ads, which at best give you a small chuckle. These are ETFs that give you full global exposure for 25 basis points or less.

Should fees be the only thing you consider when you buy an ETF? Of course not.

But low fees certainly help.

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