Schwab’s ETF Gift Horse

September 22, 2014

Schwab announced a huge expansion to its commission-free program. What’s not to love?

On Friday, Charles Schwab announced it was expanding its ETF OneSource program to bolster the ranks of ETFs for which you pay no commission for more than 180 funds. This is of course good news for investors.

After all, costs are the most pernicious—and predictable—part of investing, so anytime someone’s saving investors money, I’m happy. But it’s important for investors to understand what their options are, and what the missing pieces might be.

First, a few words about the program. Schwab’s program is extremely simple. If you have a regular old Schwab account, and you happen to trade one of the 182 ETFs on its list, then you don’t pay any commissions. You don’t have to sign up for anything. The only thing you’ll pay is an exchange processing fee on sales, which comes out to 22/100ths of a basis point (roughly $1.00 on every $50,000 of sales).

Parsing The List

In general, the ETF list is well-rounded, and most investors will be able to cobble together a well-diversified portfolio with the funds on offer. The issue is really just the lack of name brands on the list. For fairly obvious reasons, the most attractive “Core” ETFs on the expansive list are all from Schwab. And to be clear, it’s a solid list of funds:

Fund Ticker ER Average
Spread
Schwab Fundamental U.S. Small Company FNDA 0.32% 0.16%
Schwab Fundamental U.S. Broad Market FNDB 0.32% 0.16%
Schwab Fundamental International Small Company FNDC 0.46% 0.11%
Schwab Fundamental Emerging Markets Large Company FNDE 0.46% 0.13%
Schwab Fundamental International Large Company FNDF 0.32% 0.10%
Schwab Fundamental U.S. Large Company FNDX 0.32% 0.14%
Schwab U.S. Small-Cap SCHA 0.08% 0.06%
Schwab U.S. Broad Market SCHB 0.04% 0.03%
Schwab International Small-Cap Equity SCHC 0.19% 0.20%
Schwab US Dividend Equity SCHD 0.07% 0.04%
Schwab Emerging Markets Equity SCHE 0.14% 0.06%
Schwab International Equity SCHF 0.08% 0.06%
Schwab U.S. Large-Cap Growth SCHG 0.07% 0.05%
Schwab U. S. REIT SCHH 0.07% 0.05%
Schwab U.S. Mid-Cap SCHM 0.07% 0.06%
Schwab Short-Term U. S. Treasury SCHO 0.08% 0.03%
Schwab U.S. TIPS SCHP 0.07% 0.05%
Schwab Intermediate-Term U.S. Treasury SCHR 0.10% 0.05%
Schwab U.S. Large-Cap Value SCHV 0.07% 0.05%
Schwab U.S. Large-Cap SCHX 0.04% 0.03%
Schwab U.S. Aggregate Bond SCHZ 0.06% 0.05%

 

 

 

 

 

 

 

 

 

 

 

 

 

These are in fact some of the cheapest ETFs in the market. In a few cases (like the analyst pick Schwab U.S. TIPS ETF (SCHP | A-99), they’re amazingly good ETFs. SCHP beats its nearest competitor on expense ratio by 11 basis points. The Schwab U.S. Large Cap ETF (SCHX | A-95) and the Schwab U.S. Total Market ETF (SCHB | A-100) have the honor of being the two cheapest equity funds in the market.

Which begs the question, honestly: Why do investors need the other 161 ETFs in the OneSource program? The answer is simple: all the weird stuff. Notably missing from the above list are commodities, active funds, currencies, alternatives, dividend strategies, sector funds, min vol and so on. And what Schwab has done, rather prudently, is only allow those funds into the list that have relatively high expense ratios, and that don’t directly compete with their core offerings.

Put it this way: The average expense ratio (weighted by where the money actually is) in the Schwab funds on the big list is 7.6 basis points. The asset-weighted average of the non-Schwab funds? 48 bps.

 

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