From the February 2010 issue of Investment Advisor • Subscribe!

February 1, 2010

Schwab Keeps Up the Price Pressure

Cuts equity commissions to $8.95 per trade; rolls out more commission-free ETFs

Schwab is cutting costs, again. Charles Schwab Corp. announced January 7 that it will begin charging a flat $8.95 per online trade of equities or non-Schwab exchange traded funds to retail investors, including clients of Schwab Advisor Services-affiliated advisors who use Schwab's E-Delivery Services.

In addition to the pricing move on trades, Schwab also introduced in the New Year Schwab Managed Portfolios--ETFs, a fee-based advisory service that was scheduled to be launched January 19. These portfolios have an investment minimum of $100,000, and will use ETFs representing up to 20 asset classes, including equities, fixed income, real estate, commodities, and TIPS.

In announcing the moves, Schwab said it expects the lower fees may reduce its Q1 2010 consolidated revenues by "$15 to $20 million."

As for its ETF family, Schwab Investment Management launched in December two new exchange traded funds to join its four other low-priced ETFs introduced in November that feature no commissions on trades for Schwab customers. The two new funds, each with expense ratios of 0.15%, that began trading on December 11 are the Schwab U.S. Large-Cap Growth ETF (SCHG) and the Schwab U.S. Large-Cap Value ETF (SCHV). The first four Schwab ETFs--U.S. Broad Market (SCHB), U.S. Large-Cap (SCHX), U.S. Small-Cap (SCHA), and International Equity (SCHF)--were launched November 3 by the investment management arm of Charles Schwab Corp.

Charles Schwab Investment Management (CSIM) said the four ETFs launched November 3 had already attracted $209 million as of December 9, with average daily trading volume across the four ETFs of 555,000 shares since their inception. The ETFs for a planned January 2010 launch are one for emerging markets and the other for international small-cap stocks.

ETF Assets Up 45% in 2009

The move may be a reflection of both the popularity of ETFs among retail investors, but their underutilization among institutional investors. In its most recent Vision Focus report released January 11, State Street Corp. noted that ETFs now account for almost $1 trillion in assets, but points out that "institutional investors often do not take full advantage of these flexible investment tools." State Street held more than $200 billion worth of ETF assets as of December 31, 2009. State Street Global Advisors' monthly Snapshot of the ETF industry in the U.S., ETF assets rose 45%, or $242 billion, in 2009 to $775.8 billion, led by strong growth in commodity ETFs (assets for the year were up 105%), fixed income ETFs (assets up 78%), and international ETFs (assets up 78%).

Even companies like T. Rowe Price are getting into the action. ETF guru Tom Lydon reported that T. Rowe has filed with the SEC to offer a family of actively managed ETFs.

And if the transparency, liquidity, low price, accurate index tracking, and--in Schwab's case at least--free trading doesn't encourage advisors and their clients to buy ETFs, perhaps an early January announcement by Invesco PowerShares, a major ETF manufacturer, might do the trick: 116 out of 117 of Invesco's ETFs paid zero capital gains distributions for 2009.

With tax planning likely to move to center stage due to the Obama Adminisration's need to pay for the economic stimulus and healthcare reform, ETFs might be getting top billing very soon.

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