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In the world of exchange traded funds (ETFs), it’s often a race to the bottom and that’s a good thing for advisors and clients because the bottom in question is fees.
Saying the ETF industry is ultra-competitive is an understatement and one of the primary fronts on which issuers compete is fees. That stands to reason because data confirm that in any given year – essentially every year – the ETFs raking in the most cash are the ones with the lowest fees. The real “sweet spot”, besides ETFs with fee waivers is, you guessed, yearly expense ratios of 0.01% to 0.10%, or $1 to $10 on $10,000 investments.
That’s a space long pioneered by Vanguard, but also one with plenty of competition, namely from Charles Schwab. In fact, one of the primary reasons Schwab is the fifth-largest U.S. ETF issuer, comfortably ahead of sixth place at that, is because it offers some of the lowest-cost products on the market across both equities and fixed income.
The issuer extended that tradition on June 11 by announcing fee reductions on a quartet of its popular ETFs. Let’s get into it here.
Some Well-Timed Fee Cuts By Schwab
With a picture being worth 1,000 words, consider the handy chart below.
(Table Courtesy: Charles Schwab)
Fun fact, also courtesy of Schwab: with the fee reductions announced on June 11, 16 of the issuer’s 24 ETFs, including both equities and fixed income, have yearly expense ratios of just 0.03%.
The asset manager’s latest ETF fee paring arrives at an opportune time because small-cap stocks are in rally mode and there’s still enthusiasm for international stocks. Should one or both of those asset classes deliver durable, long-term rallies, clients will benefit from fee cuts highlighted in the table above, albeit in modest fashion. But hey, savings are savings.
The expense ratio trimmings are also testaments to economies of scale. Combined, the four ETFs in the table have $54.7 billion in assets under management. The smallest of the quartet is SCHC, which has $5.35 billion in assets. Said another way, the bigger an ETF gets, the easier it is for issuers to lower investor-facing expenses.
How Much Lower Can ETF Fees Go?
That’s the big question and there are some ETF experts that believe the low-cost leaders, such as Schwab and Vanguard, have limited to scope to lower fees, but that remains to be seen. After all, the issuers have to make money, too.
On an industry-wide basis, there’s plenty of room for more fee cuts. Whether or not other issuers decide they want to compete on costs is to be determined, but it’s clear Schwab is committed to lower costs.
“With these fee reductions, an investor can construct a U.S. diversified portfolio that includes large-, mid- and small-cap equities; treasury, corporate and municipal bonds; and diversifying asset categories like REITs, utilizing Schwab market cap-weighted index ETFs, that have expense ratios ranging from 3 bps to 7 bps,” said the Texas-based issuer in a statement. “In nominal terms, that means an investor with $10,000 would incur annual fund expenses of approximately $3 to $7, depending on the applicable expense ratio.”
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