Schwab Matches Mutual Fund and ETF Expense Ratios, Now $4.95 Trades

schwab0

Update: Schwab has matched Fidelity’s price cut at $4.95 per trade + $0.65 per options contract, effective March 3, 2017. See press release for details. Everyone is battling for your assets and the ability to scale. (TD Ameritrade also announced a price cut to $6.95 per trade, down from $9.99.)

Original post:

Schwab announced some changes last week regarding their index mutual fund line-up and trade commissions. Here is the press release and a table of the updated mutual fund expenses [pdf]. Here are the highlights:

  • Stock trades now $6.95. Beginning February 3, 2017, the company will reduce its standard online equity and ETF trade commissions from $8.95 to $6.95.
  • Schwab Index mutual fund expense ratios now match their Index ETFs. Starting March 1, 2017, expenses for the Schwab market cap-weighted index mutual funds will be lowered to align with their Schwab ETFs™ equivalents.
  • Schwab Index mutual funds now have no investment minimum. You don’t have to worry about Admiral shares, Premium Class shares, etc.
  • New Satisfaction Guarantee. I’m not sure how this would work in practice, but it says “Simply, if a Schwab client is not satisfied for any reason, Schwab will refund any related commission, transaction fee or advisory program fee paid to the firm.”

Here are the three mutual funds that I would care most about:

  • Schwab Total Stock Market Index Fund mutual fund expense ratio used to be 0.09% while the ETF version cost 0.03%.
  • Schwab International Stock Index Fund mutual fund expense ratio used to be 0.19% while the ETF version was 0.07%.
  • Schwab TIPS Index Fund mutual fund version used to cost 0.19% while the ETF version was 0.05%.

These were pretty big differences, which was why I felt it was rather obvious that Schwab was making their ETFs a loss-leader in order to be slightly cheaper than Vanguard and/or iShares. I’m guessing they are still selling these index products at a loss to gain market share, but it’s nice to see that they have now simplified their expense ratios across the board. The self-directed brokerage option of my 401(k) plan is through Schwab and only allows mutual funds, so this is a positive change for me.

I have been impressed by the committed strategy Schwab has undertaken towards low-cost, index investing. Schwab has an existing profit machine from its traditional services, but hasn’t been afraid to disrupt and even cannibalize itself. The key is that people seem to like Schwab customer service, whereas I would rate Vanguard as “satisfactory”. If Schwab can have top-quality index products and maintain a reputation for better customer service, that would be a great long-term position.

As an aside, you can’t buy shares of Vanguard but you can buy an ownership stake in Schwab. I don’t own any individual shares of Schwab (SCHW) stock as of this writing, but I would not be surprised if it made a good long-term holding. Once interest rates rise, Schwab will start making a lot more money on its customers’ cash balances (which it forces you to hold it their Intelligent Portfolios robo-advisor instead of charges upfront fees). It will be interesting to see how it plays out. I’m just putting this down in writing so I can check back on my prediction later in 2022 and 2027.

Comments

  1. another grate blog post buddy, yes i do agree schwab is a good brokrage company/bank, i just open my account with them due to a 100usd promo they r offering (still got like 20days left to get the 100usd) u need to have ur account open for like 45 days before they deposit the 100usd

    http://www.schwab.com/public/schwab/nn/refer-prospect.html

    i do also agree with u regarding the difference between Vanguard and Schwab where vanguad is more kind of old school and slow company where schwab is more up to date. But i wish u write more regarding the differences. How with Vanguard u can have a outside of the usa address for ur account but witch Schwab u can not. How schwab have a checking out feature with a atm card and vanguard dose not. How much more easy it is to open a schwab account 1 to 2 days and vanguard takes 2 to 3 weeks.

    there are just so many differences. gues i do like the vanguard 0.05% expense ration on VOO and that is my favorite one. schwab do have one good one i like which is SCHA which is also at low 0.06% expense ration 🙂

    (Open a new qualifying Charles Schwab account, with no minimum deposit, and the $100 bonus will be placed into your account usually within 30 days. Monthly fees may apply. You can also open the account via telephone by calling 1-800-398-8640 and mentioning the promo code REFER.)

  2. Schwab Domestic Small Cap Fund (SWSSX) is actually pretty compelling at 0.06%. It’s worth noting that unlike Vangurd, the Schwab ETF and Mutual Funds are not replications of one another. SWSSX holds a greater number of stocks and has more micro cap exposure than either SCHA (Schwab Small Cap ETF) or VB/VSMAX (Vanguard) at a lower cost. Since bid/ask spread isn’t an issue with mutual funds, I would argue SWSSX is now the most attractive option for Small Cap Blend assuming you are ok with using a mutual fund rather than an ETF.

Speak Your Mind

*