Last week Charles Schwab lowered the expense ratios on 15 of its ETFs to almost nothing. Investing in the Schwab Large Cap ETF (SCHX) now costs just 0.04 percent. Additionally, Schwab account holders who trade online can trade their ETFs commission free.
Vanguard lowered the expenses on some of its ETFs earlier in the year, and Blackrock has indicated that they will be following suit on some of their iShares ETFs.
The answer is that this is a good thing for investors. Index ETFs are a great portfolio building vehicle; I use them extensively in the portfolios of many of my individual clients. In reality, however, most index ETFs from major ETF providers are already cheap. I highly doubt that I would move any money from an existing ETF position due to these expense reductions.
More importantly, be sure to look at the ETF’s underlying index.
For example, compare these popular funds:
All in all, any of these three ETFs will provide a solid allocation to large-growth stocks, but there are differences in each that might be important to you in building your portfolio.
Beyond the largest and most common ETFs, beware of ETFs with somewhat suspect underlying indexes. According to Chuck Jaffe in a recent MarketWatch article, a Vanguard report found that “1,400 U.S. listed ETFs track more than 1,000 different indexes. But more than half of these benchmarks had existed for less than six months before an ETF came along to track it.”
Many of these new ETFs rely on the hypothetical back testing of these new indexes. While history is not always a good predictor of future performance, I do like to see an ETF with an underlying index that has been “battle tested” in the real world.
Buy smart. By this I mean look at how you will be investing. Will you make larger lump-sum purchases? If so, paying a transaction fee for an ETF really won’t make much of an impact. However, if you will be making smaller purchases, say via dollar-cost averaging, it pays to look around.
Also, note I am discussing index ETFs. Another industry trend has been the proliferation of new actively managed ETFs, highlighted by PIMCO’s ETF version of its popular PIMCO Total Return bond fund. Expenses and a look at the underlying portfolio are just as critical here.
By and large, ETF price wars are a good thing for investors. Over time, it will be interesting to see if smaller ETF players like Schwab can make a go of it with such low fees. Given their deep pockets and marketing savvy I wouldn’t bet against them.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. Read more about Roger here.