Schwab Once Again Undercuts Competition on Pricing With U.S. REIT, Mid-Cap ETFs

by: Morningstar

By Robert Goldsborough

On Thursday, Jan. 13, financial-services giant Charles Schwab (NYSE:SCHW) rolled out two new, very low-cost exchange-traded funds: Schwab U.S. REIT ETF (NYSEARCA:SCHH) and Schwab U.S. Mid-Cap ETF (NYSEARCA:SCHM).

The new funds clearly are aimed both at undercutting other ETFs tracking the very same indexes and at solidifying Schwab's status as a low-cost ETF provider. The new ETFs are the 12th and 13th ETFs that Schwab has brought to market since entering the ETF marketplace in November 2009. SCHH is targeted at investors interested in owning a basket of REITs that own commercial and residential real estate. It tracks the float-adjusted market-capitalization-weighted Dow Jones U.S. Select REIT Index, which contains about 80 REITs that both own and operate income-producing commercial and/or residential real estate, derive at least 75% of their total revenues from owning and operating real estate assets, and have a minimum market cap of $200 million. By design, SCHH does not own a large portion of the real estate landscape, including mortgage REITs, net-lease REITs, real estate finance companies, mortgage brokers and bankers, commercial and residential real estate brokers, or homebuilders.

Another large and liquid ETF, SPDR Dow Jones REIT (NYSEARCA:RWR) (0.25% expense ratio), already tracks the same index that SCHH follows. Other ETFs that SCHH competes against include the very inexpensive Vanguard REIT Index ETF (NYSEARCA:VNQ) (0.13% expense ratio); the concentrated iShares Cohen & Steers Realty Majors (NYSEARCA:ICF) (0.35% expense ratio), which owns only 30 of the largest and most liquid REIT companies; the broad iShares Dow Jones U.S. Real Estate (NYSEARCA:IYR) (0.47% expense ratio), which owns equities like mortgage REITs that SCHH will not; and the small and thinly traded Wilshire U.S. REIT ETF (NYSEARCA:WREI) (0.32% expense ratio).

SCHH charges an expense ratio of 0.13%.

Meanwhile, SCHM, which also charges 0.13%, is a broad mid-cap ETF that joins an already-crowded landscape of mid-cap blend ETFs. SCHM tracks the float-adjusted, market-cap-weighted Dow Jones U.S. Mid-Cap Total Stock Market Index, which already is followed by another SPDR ETF, SPDR Dow Jones Mid Cap (EMM). The small and fairly thinly traded EMM charges an annual fee of 0.25%.

Other mid-cap blend options for investors include Vanguard Mid-Cap ETF (NYSEARCA:VO) (0.14% expense ratio), SPDR S&P MidCap 400 (NYSEARCA:MDY) (0.25% expense ratio), iShares Russell Midcap Index (NYSEARCA:IWR) (0.20%), and iShares S&P MidCap 400 Index (NYSEARCA:IJH) (0.20%).

The new mid-cap ETF helps Schwab complete its product lineup in order to give current Schwab customers a mid-cap ETF option, instead of forcing them to buy an ETF from another provider.