Schwab Mutual Funds Now At An ETF Price

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.

‘Tidying Up’

To Ben Johnson, director of global ETF research at Morningstar, “Schwab is simply tidying up.”

“We’ve seen others—most notably BlackRock and Fidelity—make similar moves in recent years. In all cases, some combination of repricing, rebranding and expanding of these firm’s index mutual fund ranges has been aimed at slowing the tide of money headed toward Valley Forge, PA,” Johnson said. (Valley Forge is home to Vanguard, the largest mutual fund shop in the world, and now the second-largest ETF issuer in the U.S.).

Schwab has been an aggressive competitor in price from day one in the ETF space, often going head to head with Vanguard, which also offers some of the lowest expense ratios in the market today on ETFs as well as mutual funds.

Schwab’s move may also be an example of what’s in store for the future of the mutual fund and ETF industries.

“There is no reason that ETFs and index mutual funds cannot both just co-exist, but also thrive,” Johnson said. “Many investors place little or no value on being able to trade their funds on an intraday basis. They may be investing exclusively through a 401(k) plan where ETFs are not an option, or they are already saving and regularly dollar-cost-averaging into a mutual fund. ETFs are not for everyone.”

“That said, many mutual funds are still saddled with baggage—loads, 12b-1 fees, etc. There is ample evidence that many fund families are moving to ditch this baggage as they file for T-shares or ‘clean’ share classes. So, the distinction between the two vehicles—mutual funds and ETFs—may become ever-finer over time,” he added.

Source: Charles Schwab

Contact Cinthia Murphy at [email protected]