Charles Schwab is letting its pricing do the talking in selling exchange-traded funds.
Specifically, the firm last month slashed the management fees by 25% to 59% for each of its 15 Schwab ETFs. For example: management fees for the Schwab U.S. Dividend ETF have been reduced from 17 basis points a share to 7 bps, its U.S. Small-Cap ETF from 13 bps to 7 bps and its U.S. Large-Cap ETF from 8 bps to 4 bps.
In a conference call with reporters, Marie Chandoha, president of Charles Schwab Investment Management, said the weighted average on Schwab's lineup of ETFs would now be 7.7 basis points, down from 12.9 basis points.
Walt Bettinger, chief executive officer of Charles Schwab, played the discounts as a win for investors. But it's also part of a bid for market share among ETF issuers.
At the end of June, Schwab ranked as the 12th largest seller of ETFs, with $6.7 billion in fund assets, according to the ETF Industry Association. That trails BlackRock, the market leader, by a wide margin. Its ETF assets under management? $482.3 billion.
"Last time I checked, low fees on index products are great for investors," said Bettinger. "The price investors pay for investment products is important, but we're not going to stop here."
He gave no details. But Bettinger coyly said that the firm's big picture strategy is based on the needs of its clients and reiterated that the firm's latest move is "a great thing for the investor."
So will Schwab also cut fees on its mutual funds?
Chandoha said that Schwab's mutual funds "are already offered at a great value." But she did note that Schwab earlier this year applied to the Securities and Exchange Commission to launch actively managed ETFS. She did not elaborate.
The firm launched its first ETFs in November 2009, becoming the first to introduce commission-free online trading of ETFs in client accounts. By the end of this August, Schwab had $7.2 billion in assets under management in its ETFs.
So where does that rank Charles Schwab on the U.S. ETF totem pole? According to London-based ETFGI, it ranks 12th behind PIMCO ($7.25 billion) and ahead of Direxion ($6.1 billion) among the top 20 shops by assets at the end of August.
Deborah Fuhr, a partner at the London-based research shop ETFGI, said Schwab is looking to capitalize on its distribution capabilities and investors' growing appetites for cheaper products. "Given the significant focus by investors on costs with total expense ratios being very transparent, it is an important factor for many investors, especially retail investors," she said.
"Schwab has been significantly successful in the retail space and the fact that they recently reported about $130 billion in ETFs custodied on their online platform (means) they are clearly an important venue for both direct retail and advisors who are using ETFs," Fuhr said.
Fuhr also said that ETF giants such as Vanguard and iShares and other ETF providers will now have to pay closer attention to what their competition is doing, even if the competition is smaller in size. "Clearly, Vanguard offers no commission trading on their ETFs also, which is an advantage that they bring to advisors and retail investors that is not something too many of the other ETF managers can offer. But everyone has to pay attention to what's happening in the marketplace if you're in that market."
To be sure, BlackRock is reportedly cutting fees for its large ETFs next quarter in response to pricing pressure from the Vanguard Group. "We expect to be announcing a whole strategy in how are we addressing the fee issue related to these large, liquid, core types of ETFs," said Larry Fink, chief executive officer of BlackRock, at the Barclays 2012 Global Financial Services Conference. The firm declined to comment on Schwab's latest fees cuts.
A Vanguard spokesperson also did not return a call for comment on Schwab's latest intiative.
Less than two years removed from topping the $1 trillion in assets under management mark for the first time, U.S.-listed exchange-traded products are now home to nearly $1.3 trillion in combined AUM. Analysts at Bank of America think that number could almost double to $2.5 trillion in five years.
In a research piece published last month, analysts at Bank of America said that overall ETF assets in 2012 increased some 24% through a combination of price appreciation and flows. The analyst further expects U.S. ETF assets to increase by $230 billion over the next year and reach $2.5 trillion within the next five years.
While they also expect Vanguard's low-cost ETFs to set the stage for a fee war among its rivals, the analyst also noted that "There are some examples of the importance of fees in the competition for assets, but, for most ETFs, we do not see a clear link between expenses and fund flows due to factors such as fund structure, optimization strategy, securities lending practices, tracking error, creation/redemption mechanism (in-kind or cash), etc.,"
Au contraire, according to Robert Goldsborough, an ETF analyst at Morningstar. "From our standpoint, we've found that assets do move over a few basis points difference," he said. "It's also pretty clear that Schwab and some of the other providers have a commitment to give their investors low costs. They're the 11th largest ETF provider (by Morningstar's count) so they're not a huge player yet so they're banking on these price cuts to grow their market share pretty significantly."
Schwab is looking to leverage its retail distribution platform to outmarket its rivals, he said.
"What Schwab has that a lot of other firms don't have is a distribution platform that's out of this world,'' he said. "They have a massive retail brokerage platform so a lot of people are Schwab customers even if they don't own Schwab ETFs. The response from Vanguard will be to lower their ETFs even lower so we'll see where this all shakes out."
Schwab also has a "thoughtful" approach to its products, with its ETFs covering broad markets, rather than niches focused on by firms such as Global X, which last month folded an auto ETF and an aluminum ETF. "I think we're going to see them bring out more broad-based ETFs," Goldsborough said.
