Schwab’s ETF Gift Horse

September 22, 2014

Gift Horse Dental Exam

So is the Schwab program all that and a bag of chips? It depends. I’ve personally been a Schwab customer since I first started investing, two months before the market crash of 1987 (and yes, boy do I have impeccable timing).

When Schwab waded into the ETF market, I did what most prudent and boring investors did: I waited to make sure the assets and volumes were there, and as I made new allocations to long-term positions, particularly in taxable accounts, I considered the Schwab funds. I do in fact have a position in SCHB.

Schwab’s OneSource expansion can best be described as extremely shrewd. They can legitimately market that you can get everything from long-dated oil contracts to Swedish krona to hedge fund replication without a commission.

Certainly, there’s a class of investor out there who’s going to be actively trading these narrower slices of the market, and perhaps the ability to do so cheaply draws those assets into Schwab.

If I were in Schwab’s shoes, I’d be pretty certain that a big chunk of that money actually just ends up parked, like mine, in the cheap, boring stuff. And that’s how Schwab wins. It’ll get 80 percent of those clients’ new assets. And the 20 percent that gets actively traded in the narrower stuff? Well, it’ll make plenty of money on that as well, I’m sure.


At the time this article was written, the author held a position in SCHB. You can reach Dave Nadig at [email protected], or on Twitter @DaveNadig.

 

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