Building on a trend of ever-lower exchange-traded fund fees, Charles Schwab today said it cut the operating expense ratio on its 15 ETFs to an industry low average of 7.7 basis points. The company said the move makes each fund the cheapest in its respective Lipper category.
The fees were reduced on various ETFs from six basis points to four, and in several cases went from 13 basis points to nine. The most expensive fees went from 35 basis points to 20.
The new fees are part of Schwab's efforts to capture a bigger slice of the ETF market, Schwab officials said. It precedes the creation of a 401(k) offering that will be comprised of all ETFs and is expected to launch sometime in 2013, said Schwab CEO Walt Bettinger, who spoke during a press conference announcing the lower ETF fees.
The San Francisco-based discount brokerage firm rolled out its first ETFs in November 2009, and its ETF family now has $7.2 billion in assets. Schwab is the 10th-largest U.S. ETF provider, according to IndexUniverse.
Bettinger declined to say specifically how much the new low prices will cut into Schwab's operating profit for ETFs, but said the move aims to attract more customers to Schwab's entire product line.
But dirt cheap fees aren't a surefire recipe for success. FocusShares LLC, an affiliate of discount brokerage Scottrade, in August liquidated its family of 15 ETFs because they didn't attract enough assets. The funds were touted for their super cheap expense ratios of between 0.05% and 0.19%. The Focus Morningstar ETFs, which were based on Morningstar domestic equity indexes, held roughly $100 million in total assets.
Todd Rosenbluth, an ETF analyst with S&P Capital IQ, believes Schwab's fee cuts, in tandem with the company's strong brand name, will help it attract assets.
"Schwab doesn't offer sector funds or country specific funds that appeal to more tactical invesors," he says. "Schwab's ETFs appeal to investors looking for diversified equity exposure with cost being a top priority. They're going after a broader audience."
Rosenbluth adds that he doesn't expect Schwab to cut into the market share of the big three ETF providers--iShares, State Street and Vanguard.
"They'll likely remain a small provider," he says. "But Vanguard's success shows that a low-cost provider can gather assets."