Schwab vs. Vanguard ETF Expense Ratio Comparison

Schwab recently announced lowered expenses on all of their 15 Schwab-branded ETFs, undercutting everyone else’s comparable ETFs in every category, including Vanguard. Quite a bold move! Here is a limited comparison of comparable Vanguard and Schwab ETFs. The asset classes are picked to include the common asset classes as mentioned in many passive investing books and articles, but admittedly biased towards the ones that I like to use in my own portfolio. This way, I can also note which asset classes are not covered.

Briefly, an expense ratio of 0.01% means that on $10,000 invested you would be charged $1 a year in fees. The fees are taken out of the ETF’s share price, or net asset value (NAV), a tiny bit each day. So a difference of 0.03% (3 basis points) on a $10,000 investment would add up to just $3 per year.

Asset Class Schwab ETF
Ticker
New Expense Ratio Vanguard ETF
Ticker
Expense Ratio
Broad US Stock Market SCHB 0.04% VTI 0.06%
Broad International Stock Market - - VXUS 0.18%
Developed International Stock Market SCHF 0.09% VEA 0.12%
Emerging Markets SCHE 0.15% VWO 0.20%
REIT (Real Estate) SCHH 0.07% VNQ 0.10%
Broad US Bond Market SCHZ 0.05% BND 0.10%
US Treasury Bonds – Short-Term SCHO 0.08% VGSH 0.14%
US Treasury Bonds – Intermediate-Term SCHR 0.10% VGIT 0.14%
US Treasury Bonds – Long-Term - - VGLT 0.14%
TIPS / Inflation-Linked Bonds SCHP 0.07% - -

My comparison differs from the Schwab-provided version in the area of Treasury ETFs, with what I think are more appropriate Vanguard pairings. As Vanguard does not have a TIPS ETF, I should note that the Schwab TIPS ETF compares favorably to the popular iShares TIPS ETF (ticker TIP) with an expense ratio of 0.20%.

If you already have your money with Schwab, this is great news and a good sign for the future that they are committed to building up some decent-sized assets and trading volume on their ETFs. (Vanguard’s higher asset sizes and volumes mean lower bid/ask spreads and smaller NAV deviations, resulting in lower overall trading costs.) In a Schwab brokerage account, you can trade Schwab ETFs commission-free.

However, if you’re already investing with Vanguard, I don’t think these small expense ratio differences are enough to warrant moving assets especially if you have unrealized capital gains. (You can also trade all Vanguard ETFs commission-free inside a Vanguard brokerage account, and also many of them free at TD Ameritrade.) Vanguard has a long-standing commitment to “at-cost” investing and passing their savings onto the retail investor. In contrast, Schwab is almost certainly losing money on many of these ETFs, and thus using the low expense ratios as a temporary loss-leader “sale” to attract assets. For example, their bond ETF (SCHZ) currently has $316.5 million in assets and thus only generates around $158,000 a year in fees. That’s probably less than one employee salary at Schwab. In other words, I don’t think a substantial savings margin is sustainable over the horizon of many decades. I’d still recommend Vanguard for new investors, especially as Vanguard also has cheaper stock commissions for outside ETFs and individual stocks ($7 or less vs. $8.95).

A good point brought up in the Bogleheads forum is the ability of some people to gain access to these Schwab ETFs in their 401(k) retirement plans through the Schwab Personal Choice Retirement Account® (PCRA). If your retirement plan offers such a brokerage window, you may be able to trade these cheap Schwab ETFs for free with your tax-deferred money. Most PCRAs charge an annual fee of around $30-$50. Unfortunately, I found out that due to silly regulations, if you have a 403(b) plan your PCRA account is limited only to mutual funds. However, Schwab does have a small selection of low-cost index mutual funds as well.

Comments

  1. Nice job on the graphic.

    Now we need to track their performance and see which ones get the better returns.

  2. Why would you recommend a product with a higher expense if the two products are practically identical. Schwab also has lower expense ratios for their index mutual funds. Seems like you are steering people towards Vanguard just because you are loyal not because they are actually better.

  3. @Danny – If ETFs were one-time purchase like a jug of milk or a gallon of gas, then I would recommend buying the Schwab ones. But ETFs are a big commitment once you have capital gains, and Schwab can raise the price in the future at any time. Switching out of Schwab ETFs later would be very costly.

    I’d feel better about it if their current prices weren’t so artificially low. Given the low absolute cost differential, I would not recommend such a commitment to my own family, and that’s about the best and honest advice I can give. I’d be willing to bet my own money and over the span of 20 years, Vanguard’s overall costs will be the same or lower.

    I decided not to mention additional factors like indexing skill, bid/ask spreads, and historical premium/discount from NAV. These are all other areas where tiny variations would make the actual trading cost between the two classes of ETF essentially the same.

    However, I am personally looking into them for my 403b plan, because Schwab may be the best available option in that case. This is still a great development overall, and may push others like iShares and Fidelity to offer low-cost ETFs to their clients.

  4. This kind of competition is great for retail index investors like us!

  5. Yea, check the bid/ask spreads. When I talked to a Schwab rep on etfs they did note that some are not as high volume as others and thus have a bigger spread. That can eat up part of the savings. I dont know if I would actively change just because of a few one-hundreths difference, but if you already have a Schwab account, it is good to know if you want all your savings under one umbrella.

Speak Your Mind

*