Another salvo in the fee wars: Schwab cuts expense ratios on index funds

Offers guarantee on services

Feb 2, 2017 @ 1:29 pm

By John Waggoner

Charles Schwab & Co. has fired the latest round in the mutual fund cost-cutting battle, slashing expenses on several of its open-ended index funds.

Schwab said Thursday that it would cut the expenses on its index funds to the same level as their equivalent exchange-traded funds. In the case of the Schwab S&P 500 Index fund, for example, the expense ratio for the Schwab S&P 500 Index fund (SWPPX) would fall from 0.09% to 0.03%, the same as the Schwab U.S. Large-Cap ETF (SCHX).

Additionally, the lowest expense ratio would apply to all investors, whether they invested $1 or $1 million. In normal industry practice, institutions with $1 million or more to spend get significantly lower expense ratios than individuals with $500 to invest. The lower expenses will start March 1.

Two new Schwab bond funds, expected to launch on Feb. 23, will follow the same rules. The funds are Schwab U.S. Aggregate Bond Index (SWAGX) and Schwab Short-Term Bond Index fund (SWSBX).

Schwab will also reduce standard online equity and ETF trade commissions from $8.95 to $6.95, which, Schwab says, is lower than those charged by Fidelity, TD Ameritrade, E*Trade and Vanguard. The lower commission rates start Friday, Feb. 3.

Commission reduction
Schwab Fidelity TD Ameritrade E*Trade Vanguard
$6.95 $7.95 $9.99 $9.99 $7 - $20 depending on number of trades
Source: Schwab

The San Francisco-based discount brokerage also instituted a money-back guarantee for its services. “Any fee, any commission, any advisory fee that the client is paying – if, for any reason, at any point in time, the customer is dissatisfied, we will refund that cost to them,” CEO Walt Bettinger II said on a conference call Thursday. Financial services companies rarely offer guarantees, he noted. “Any other part of consumer lives if we buy a product that's not to our satisfaction, we get our money back,” he said. “We're an outlier on this.”

Chairman Charles Schwab said in a statement, “Indexing is the simplest, easiest, cheapest way for the average American to build personal wealth. It's dynamic yet predictable, and offers diversification, cost-efficiency and the potential growth opportunities that come with owning a broad basket of securities. With today's news, we're making it even easier for mainstream investors to build indexed portfolios.”

A report issued Thursday by Moody's Investors Service noted that indexing has plenty more room to grow. “We view the passive phenomenon as comparable to the adoption of a new technology,” said the report. “Investor adoption of passive and low-cost investment products will continue irrespective of market environments, and we estimate that passive investments will overtake active market share between 2021 and 2024.”

Index mutual fund expense reductions
Relationship Characteristics
$5,000 $100,000 $5,000,000
Schwab S&P 500 Index Fund 0.03% 0.03% 0.03%
Fidelity 500 Index Fund 0.09% 0.045% 0.035%
Vanguard 500 Index Fund 0.16% 0.05% N/A*
Schwab Small-Cap Index Fund 0.06% 0.06% 0.06%
Fidelity Small Cap Index Fund 0.19% 0.07% 0.06%
Vanguard Small Cap Index Fund 0.20% 0.08% 0.07%
Schwab U.S. Aggregate Bond Index Fund7 0.04% 0.04% 0.04%
Fidelity U.S. Bond Index Fund 0.15% 0.05% 0.04%
Vanguard Total Bond Market Index Fund 0.16% 0.06% 0.05%
Source: Schwab. Note: effective March 1, 2017. *An Institutional share class is expected to become available on 3/1/17, according to an initial prospectus filing on 12/23/16, and the operating expense ratio is unknown. Vanguard offers the Vanguard Institutional Index Fund – Institutional class at 0.04%, which is a separate fund from the Vanguard 500 Index Fund, but is designed to track the S&P 500 Index.

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