Launch of REIT, Mid-Cap ETFs Helps Schwab Solidify Low-Cost Reputation

by: Michael Johnston

Charles Schwab announced the latest addition to its ETF lineup today, launching the Schwab U.S. REIT ETF (NYSEARCA:SCHH) and Schwab U.S. Mid-Cap ETF (NYSEARCA:SCHM). The real estate fund will seek to replicate the performance of the Dow Jones U.S. Select REIT Index, the same index to which the SPDR Dow Jones REIT ETF (NYSEARCA:RWR) is linked. With an expense ratio of 0.13%. SCHH will be the cheapest ETF in the Real Estate ETFdb Category, which previously averaged 0.43% (VNQ was previously the cheapest at 0.15%).

SCHM will be linked to the Dow Jones U.S. Mid-Cap Total Stock Market Index, a benchmark that is comprised of 500 mid-cap U.S. stocks and is already linked to the SPDR Dow Jones Mid Cap ETF (EMM). SCHM will also charge an expense ratio of 0.13%, making it the cheapest in the Mid Cap Blend Equities ETFdb Category (again, the new Schwab fund takes the title from a Vanguard ETF - VO in this case - that charges 0.15%). The average for the ETFdb category had been 34 basis points.

Price Pressures

The introduction of SCHH and SCHM brings Schwab’s ETF lineup to 13, including three fixed income funds. The company saw assets explode in 2010, growing from about $350 million to more than $2.7 billion. At current asset levels, Schwab’s ETF business generates about $3.5 million in annual management fees, a negligible amount in the ETF industry. The iShares MSCI Emerging Markets Index Fund (NYSEARCA:EEM), for example, generates close to $350 million annually in management fees, while the Gold SPDR (NYSEARCA:GLD) earns about $230 million.

The ETF offerings, however, have helped to cement Schwab’s reputation as a low cost option for investors. When Schwab first entered the ETF industry in 2009, it made a splash by offering commission free trading on Schwab ETFs within Schwab accounts. In 2010, Vanguard and iShares (through a partnership with Fidelity) followed suit, and TD Ameritrade also introduced a commission-free ETF platform.

Schwab’s success isn’t the only evidence that ETF investors are gravitating toward the most cost-efficient options. Vanguard’s Emerging Markets ETF (NYSEARCA:VWO) saw inflows of more than $19 billion in 2010, closing the cap on the iShares fund also linked to the MSCI Emerging Markets Index (EEM took in just $2.2 billion, and will likely be surpassed by VWO in total AUM in the next month or two). EEM charges an expense ratio of 0.72%, while VWO charges just 0.27%.

Another head-to-head competition focusing on expense differentials is playing out in the gold space, where iShares cut fees on the COMEX Gold Trust (NYSEARCA:IAU) to 0.25% in July. During the final six months of the year IAU saw inflows of about $1.35 billion, while the Gold SPDR saw outflows of $1.5 billion. With close to $60 billion in AUM, GLD remains considerably larger than IAU (which finished 2010 with about $5.3 billion). But it seems as if ETF investors are voting with their feet, and money is moving toward the most cost-efficient options.

Disclosure: No positions at time of writing.

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