Charles Schwab has fired off the latest volley in the exchange-traded fund pricing war. The giant brokerage firm has reduced the expense ratios on six of its eight ETFs in a bid to attract more clients and to undercut the competition. “The battle for ETF custody and ETF sales is really starting to heat up,” says Tom Lydon, the editor of ETF Trends.
Vanguard, which for years has been known as the one-stop shop for low-cost fund products, is the most obvious target of Schwab’s announcement. In particular, in all six cases, the Schwab ETFs are now between one and two basis points below their Vanguard peers. Take, for instance, the U.S. large-cap growth category. Previously, Schwab charged 0.15 percent per year for its U.S. large-cap growth ETF, as compared to Vanguard’s 0.14 percent. Under its new pricing structure, Schwab will charge 0.13 percent.
Josh Grandy, a spokesperson for Vanguard, wouldn’t comment on Schwab’s price reductions. “We typically do not comment on competitors, but I can say that Vanguard has built great momentum in the ETF market since entering in 2001. Advisors and individual investors are increasingly gravitating to Vanguard ETFs, which we believe are best-in-class products offering low costs, precise tracking, and broadly diversified portfolios,” he said in an e-mail. “The evidence? [Year to date] through May, Vanguard leads the ETF industry with $14.3 billion in net cash inflow -- twice the amount of the nearest competitor. In fact, we’ve taken in about 55% of the ETF cash flow through May.
While it’s doubtful that Schwab’s reductions will cause many of its competitors’ clients to jump ship, the firm is angling for the attention of investors who are not yet attached to a specific company. Peter Crawford, the senior vice president of Investment Management Services at Schwab, says that the new prices are essentially a “bet” that by temporarily sacrificing some revenue, the firm will be able to draw in substantial amounts of new ETF investments. Schwab is also looking to use its ETF products as a way to attract investors to the firm’s other products, such as its mutual funds. “Our pricing philosophy is really about the totality of the client’s relationship with us,” says Crawford.
The so-called pricing war began in November when Schwab launched its eight ETFs. At the time, it caught the industry off-guard by announcing that investors on the Schwab platform could trade the ETFs without paying commissions. Vanguard and Fidelity joined the fray this year, with both firms doing away with commissions on various ETF offerings. Scott Burns, Morningstar’s director of ETF analysis, says that additional investor-friendly changes could be on the horizon. “I think we can continue to expect pricing pressure in this space,” he says.