Schwab Mutual Funds Now At An ETF Price

February 02, 2017

Fee compression in the ETF market is nothing new. Charles Schwab this week brought that race to the mutual fund space.

The company said today that it lowered fees on its market-cap-weighted index mutual funds to match the same fees it charges for comparable ETFs.

For example, the Schwab Total Stock Market Index Fund (STWTSX) will now cost 0.03% in fees—the same price tag as on the Schwab U.S. Broad Market ETF (SCHB). This type of fee-matching, if you will, apply to mutual funds tapping into various U.S. equity, international stock and fixed income segments, making these Schwab mutual funds among the cheapest in the market, costing anywhere from 0.03% to 0.07%—that’s $3 to $7 per $10,000 invested.

Average Mutual Fee 1.17%

Consider that a U.S. open-end mutual fund today, on average, has an expense ratio of 1.17%, according to Morningstar data. That’s $117 per $10,000 invested. Looking at fees from an asset-weighted perspective, which would offer a better representation of the experience of an average investor, a U.S. open-end mutual fund costs 0.64%—that’s 21 times more expensive than Schwab’s cheapest mutual fund.

These new price tags will also apply to any size allocation, because Schwab is eliminating account minimums, and it’s moving its mutual funds into a unitary fee structure. Traditional pricing of funds is often based on total assets, moving up and down as a result of asset growth or loss, but in a unitary fee structure, fees are decided by a board.

At other providers like Vanguard and Fidelity, different-size investors pay different levels of fees for the same fund.

What Motivated The Move?

These changes will take effect on March 1, and essentially mean that if you are a Schwab investor, price tag should no longer be a factor in deciding between a Schwab market-cap-weighted index fund and a comparable Schwab ETF.

“We want to level the playing field for all investors,” Walt Bettinger, CEO of Charles Schwab, said in a conference call.

According to Bettinger, the decision to tinker with mutual fund fees—and lower commission fees to $6.95—had nothing to do with an effort to stop outflows from mutual funds, or reverse industry trends in any way.

Instead, he says the move was motivated simply by an effort to eliminate pricing as a “barrier” to anyone considering investing with Schwab. And it’s been made possible by the fact that the company had a stellar year in 2016 in terms of revenue growth and asset gathering, so it’s now able to “share the benefits” of its success with its clients.


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