Charles Schwab, the San Francisco-based discount broker that launched its first proprietary ETFs in November 2009, is nearing the rollout of an aggregate bond ETF that will be cheaper than identical, and popular, products from both iShares and Vanguard.
According to regulatory paperwork Schwab filed recently with Securities and Exchange Commission, the Schwab U.S. Aggregate Bond ETF will trade under the symbol “SCHZ” on Arca, the New York Stock Exchange’s electronic platform. Schwab said the fund will have an annual expense ratio of 0.10 percent.
That’s cheaper than the 0.11 percent cost of the Vanguard Total Bond Market ETF (NYSEArca: BND) and the 0.22 percent a year iShares now charges for its Aggregate Bond Fund (NYSEArca: AGG). While regulatory filings containing specific information regarding price and trading symbols don’t guarantee that an ETF’s launch is imminent, they often signal that a rollout is nearing.
Schwab’s in-your-face pricing ploy goes to the heart of the company’s intention to make price a crucial piece of its ETF strategy, as we wrote about a year ago in a piece titled “Schwab Declares Price War With ETF Fee Cuts.” Vanguard is really the only other established ETF sponsor that puts pricing at the center of its strategy.
However, FocusShares, the Scottrade unit that brought a family of equity ETFs to market earlier this year, made clear that it is ready to slug it out on price with the likes of Schwab and Vanguard as well.
Vanguard’s BND has about more than $10.3 billion in asssets, while AGG from iShares has just over $12 billion, according to data compiled by IndexUniverse.
The Wages Of Price War
While price is hardly the only variable investors should be considering when they’re deciding which ETF they should choose, the fact that Schwab’s new bond ETF uses the same index as both BND and AGG shines a bright light on its pricing strategy.
The similarity of the ETFs also begs closer analysis of variables, such as tracking error and bid-ask spreads, that advisors and investors should be weighing any time they are choosing among competing funds.
That said, looking at the numbers, it’s hard to dispute that competing on price has so far worked exceedingly well for both Schwab and Vanguard.
Schwab has amassed $4.5 billion in assets in just over a year-and-a-half in the ETF business. It hasn’t exactly rushed products to market, but as IndexUniverse President of ETF Analytics mused in a recent podcast, Schwab may wake up three or four years from now and find they have $30 billion to $40 billion in propietary ETF assets.
For its part, Vanguard, now the third-biggest U.S. ETF firm, led all other ETF providers in asset gathering last year and is doing the same so far this year.
After looking at the numbers at the end of the first half, Hougan and IndexUniverse Director of Research Dave Nadig asked in their podcast, “Can Anyone Stop Vanguard?”
One question many ETF industry sources and investors wonder is how do companies like Schwab or Vanguard make money when they all but give away their funds?
As an example, some have told IndexUniverse that a fund such as the Vanguard S&P 500 (NYSEArca: VOO), which has an annual expense ratio of 0.06 percent, would have to have $1 billion to even be profitable. So where do things stand for VOO?
While officials at Valley Forge, Pa.-based Vanguard quickly point out that because its ETFs are a share class of its S&P 500 mutual, the calculation of profitability is a bit different for Vanguard than it is for other ETF firms. Moreover, the firm is technically owned by its clients, meaning its funds are run "at cost" as a matter of course.
Still, investors have plowed more than $1.3 billion into the fund since its launch about 10 months ago, according to data compiled by IndexUniverse, and it's hard to consider that magnitude of asset gathering as anything but a clear sign of success.
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