Schwab Launches Commission-Free ETFs

The expense ratios on the new exchange-traded funds from the nation's largest discount broker also are super low.

Charles Schwab is the latest financial powerhouse to get in on the market for exchange-traded funds. By rolling out a series of commission-free ETFs, the nation’s largest discount broker is simultaneously taking on such big players as Vanguard Group and State Street Global Advisors and attacking one of the ETF concept’s drawbacks: the trading expenses that make them inefficient for dollar-cost averaging and other recurring-investment strategies.

It’s not hard to see why Schwab wants to get into ETFs. The number of such funds is soaring, quadrupling over the past three years to 841. ETFs now hold nearly $700 billion in assets. Investors like them because you can buy and sell them during the day like stocks, rather than wait for the price at the end of the trading day. And by offering commission-free ETFs to its brokerage clients, Schwab is eliminating an expense that can reduce their appeal.

Will the big rivals follow suit? The answer, for now, appears to be no. A Fidelity spokesman would say only that the firm is always looking to enhance its brokerage offerings and pricing. (Fidelity only has one ETF, which tracks the Nasdaq [symbol ONEQ].) Vanguard is expanding its family of 39 ETFs later this year with seven new bond offerings. Top Vanguard customers -- those with $1 million or more in assets -- already get 12 free trades a year on stocks and ETFs. But most customers pay $12 to $25 a trade. Vanguard has low expenses on its ETFs, but that could still leave you paying more than $200 a year in commissions if you were to invest monthly.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Demand is rising. The popularity of ETFs seems to be growing by the minute. Schwab surveyed independent investment advisers and learned that 39% of the respondents plan to invest more of their clients’ money in ETFs. And five out of six of the advisers already use ETFs.

Schwab’s task is to persuade its advisers and the owners of its nearly 8 million brokerage accounts to consider using its ETFs. Its slogan for its new line of products is memorable: “Everyone Trades Free.” Another draw of the new Schwab ETFs: minimal expense ratios.

The Schwab U.S. Broad Market ETF (SCHB) charges 0.08%, which compares favorably with the 0.09% for Vanguard’s similar Total Stock Market ETF (VTI) and is well below the 0.21% for iShares’ Russell 3000 Index ETF (IWV) and the 0.20% for SPDRs’ Dow Jones Total Market fund (TMW). Similarly, Schwab’s U.S. Large-Cap ETF (SCHX) carries an expense ratio of 0.08%, below the 0.13% for Vanguard’s Large Cap ETF fund (VV), the 0.09% for iShares’ S&P 500 Index (IVV) and the 0.09% for SPDRs’ (SPY). Schwab also matches or undercuts iShares, SPDRs and Vanguard with its small-cap and international stock ETFs. In all, Schwab launched four ETFs, and will add another four later this year.

If this seems like a costly strategy, Schwab has time and size on its side. It already clears roughly 20% of all ETF trades. Now is as good a time as any to offer investors a low-cost spot for their cash. Nearly $3.3 trillion is sitting in money market mutual funds, just waiting to be put to work.

Will Schwab succeed? Watch Pimco, another new ETF sponsor, for a clue. This summer and early fall, the bond behemoth launched five fixed-income ETFs with fees below those of the other big players. If it can extend its drawing powers from regular funds to the exchange-traded kind, you can figure Schwab will as well.

Associate Editor, Kiplinger's Personal Finance