Making a pitch to smaller retail fund investors, many of whom are now sidelined in cash and awaiting a return of the bull market, Charles Schwab Investment Management said it will slash the expenses on six of its equity index funds.
The firm announced Tuesday that it also is consolidating the share classes of all of its equity and bond funds, whether actively or passively managed, into a single class with each fund having a single expense ratio for all investors regardless of their account sizes.
The company will now open accounts for as little as $100 in all of its equity and bond funds, and the expense ratios within those funds will be the same regardless of account size. Vanguard's lowest threshold for opening a fund is $1,000.
"These are permanent reductions," said Schwab's senior vice president of investment management services Peter Crawford. "These are not promotional reductions." They affect both existing and new shareholders.
Schwab says it means to undercut the pricing and share schedules of competitors Vanguard and Fidelity, though the move would also seem to be a reaction to the market turmoil, where investors have been skittishly sitting on the sidelines in cash, and moreover to the revolution of exchange-traded funds, which have been sapping oxygen out of the mutual fund universe.
In any event, servicing a $100 account the same as a $100,000 account, as Schwab claims it's doing, would be expensive and means the company will likely eat the costs. The hope, say outside observers, is to get customers to use other Schwab services.
"I would say it may be they're aiming at ETFs first and Fidelity and Vanguard second," said Russ Kinnel, a director of mutual fund research at Morningstar. "They are treating it as a loss leader, but unlike some of those fund companies where you might have one fund, obviously Schwab has a lot more services and investments to sell you. If you put $500 in their index fund but buy some more funds or stocks or other products through their platform that obviously gets them into profitable territory."
The fund has cut the expense ratios on two of its equity index funds to 9 basis points: on the Schwab S&P 500 Index Fund, from 19 basis points, and the Schwab Total Stock Market Index Fund, from 38 basis points. The Schwab International Index Fund, meanwhile, has dropped to 19 basis points from 50, the Schwab Small-Cap Index Fund from 34 basis points to 29, the Schwab 1000 Index Fund from 34 to 29. The Schwab Institutional Select S&P 500 Fund expense ratio dropped from 10 basis points to 9.