Schwab New ETFs: What's the Catch?

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jma9000
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Schwab New ETFs: What's the Catch?

Post by jma9000 »

Schwab's new ETF lineup appears to capture the best of both worlds, the two worlds being Vanguard traditional open-end mutual funds and Vanguard ETFs. i.e., their expense ratios are lower than both, and they are commission free.

http://www.schwab.com/public/schwab/inv ... &lvl2=etfs

IndexUniverse writes, "In little more than a month since inception, the firm’s four ETFs have garnered more than $100 million in assets and are trading with generally high liquidity and low spreads."

http://www.indexuniverse.com/sections/n ... oogle_news

I have attempted to scour the literature for red flags and have found only one, probably not a big one, in the Schwab ETF prospectuses:

"The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets. However, the Board has determined that no such fees will be charged prior to November 14, 2011 (more than 12 months from the commencement of the fund’s operations)."

InvestmentNews states, "Schwab officials in the past have said they have no plans to activate the 12b-1 option." (See the InvestmentNews article, "Charles Schwab's no commission ETFs draw adviser's complaint, competitor's jealous barb" at http://www.investmentnews.com/apps/pbcs ... 9/1025/ETF

What is Schwab up to here, because I am thinking of switching, or at least of investing all new money with Schwab rather than Vanguard. Thoughts?
Last edited by jma9000 on Tue Dec 29, 2009 10:29 pm, edited 1 time in total.
retcaveman
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Post by retcaveman »

My Schwab rep told me they were doing this to increase market share.
"The wants of mortals are containers that can never be filled." (Socrates)
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jma9000
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Post by jma9000 »

If they are looking to increase market share for long-time Vanguard investors such as myself, it might actually work!
exeunt
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Post by exeunt »

The catch is once they have a significant amount of cash they'll probably raise their rates to recoup their losses. For most people it's not worth the effort of moving their funds to another shop if Schwab jacks up their rates 10 bp. Or they'll try to cross sell you.
DaveS
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Post by DaveS »

And do you trust Schwab to keep the expense ratios low?
Dave
linuxizer
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Post by linuxizer »

Rick Ferri posted an excellent analysis of the new Schwab ETFs about a month ago. Worth a search.
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Prokofiev
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Re: Schwab New ETFs: What's the Catch?

Post by Prokofiev »

jma9000 wrote:Schwab's new ETF lineup appears to capture the best of both worlds . . . their expense ratios are lower than both, and they are commission free.

What is Schwab up to here, because I am thinking of switching, or at least of investing all new money with Schwab rather than Vanguard. Thoughts?
It seems like most of the ETFs either have the same ER as VG or are 1 basis point less. You're saying that you would sell VG ETFs for a net of .01% on the ER?

And if you hold them in taxable, the switch could trigger cap gains tax. And if the new ETFs raise their ERs after 2 or 3 or 5 years, then what? Sell them, pay taxes on the new cap gains and switch again? This could be a major issue as your assets grow with time and you get "locked-in" to a security.

Commission-free trading is already available on ALL stocks and ETFs, so that is not much of a selling point.

But I am glad that Schwab is doing this. It will keep VG on its toes. No real reason to lower ERs when you are already the lowest priced shop in town. Competition is good.
Everything should be made as simple as possible, but not simpler - Einstein
letsgobobby
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Post by letsgobobby »

I won't move my VG money there, but in conjunction with their outstanding Schwab Visa, I will definitely put some new money there for the timebeing.
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HueyLD
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Post by HueyLD »

DaveS wrote:And do you trust Schwab to keep the expense ratios low?
My prior experience with Schwab's ever-changing pricing practices left me with little confidence in their ability to keep their word. They may have changed, I dunno. However, they lost me as a customer since I left a decade or so ago.
kjm
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Post by kjm »

It may not be worth it to move money to Schwab from Vanguard, but the no-commission ETFs along with the 2% cash back on the Schwab credit card is a terrific combo. I put about $2000 on my Schwab Visa every month (paid off in full at the end of the month of course). That's $40 going into a broad-market ETF commission free. That's the closest thing to a free lunch that I can imagine.
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Post by MnD »

HueyLD wrote:
DaveS wrote:And do you trust Schwab to keep the expense ratios low?
My prior experience with Schwab's ever-changing pricing practices left me with little confidence in their ability to keep their word. They may have changed, I dunno. However, they lost me as a customer since I left a decade or so ago.
I've been with Schwab for over a decade and my experience is just the opposite. Costs have come down steadily on just about everything, while nusiance fees and other gotchas common at other brokers have gone away. If you look at the quality of service, new ETF's, 2% credit card, web site, and their banking and lending rates it's tough to find anything comparable.

I have numerous accounts and have even complex issues solved with a single phone call to a dedicated rep. He conferences in specialists as needed and stays on the line until whatever I need is addressed. They have never tried to sell me anything.
Horatio
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Post by Horatio »

I too have wondered about the "catch" with the Schwab ETF's.

One issue some have pointed out is that they might be thinly traded, in which case their price may deviate too far from NAV.

Nonetheless, I have some at the moment. Like MnD, my impression is that Schwab's service seems to be getting better overall, not worse.
rdgamblr
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Post by rdgamblr »

linuxizer wrote:Rick Ferri posted an excellent analysis of the new Schwab ETFs about a month ago. Worth a search.
http://www.bogleheads.org/forum/viewtop ... chwab+etfs
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seugene
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Post by seugene »

A while ago I looked into Fidelity's 0.10% ER Index funds. Even though Vanguard's expenses are higher, it managed to eek out higher net returns. How a fund is run in practice can make a difference.

At the end of the day, I do not think it matters that much. I have some Fidelity index funds in my tax-advantaged accounts (so I can flee with no tax cost as soon as they raise the fees), but only because I think Fidelity is definitely better than Vanguard for some other services like brokerage (unless you are Flagship) and some banking-like products and services. So I basically park some money in their mutual fund or two because it meets my asset allocation and because the money is there and because rollover is more of a hassle.

Unlike any Vanguard's funds, these things are definitely loss leaders for Schwab and Fidelity, so I think it is only a matter of time when ERs @ Fidelity and commissions and/or ERs @ Schwab will be raised. So, I absolutely do not suggest this for taxable accounts.
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Post by MnD »

seugene wrote: Unlike any Vanguard's funds, these things are definitely loss leaders for Schwab and Fidelity, so I think it is only a matter of time when ERs @ Fidelity and commissions and/or ERs @ Schwab will be raised. So, I absolutely do not suggest this for taxable accounts.
Is this just idle speculation or do you have a basis in fact for these statements?
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Boglenaut
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Post by Boglenaut »

MnD wrote:
seugene wrote: Unlike any Vanguard's funds, these things are definitely loss leaders for Schwab and Fidelity, so I think it is only a matter of time when ERs @ Fidelity and commissions and/or ERs @ Schwab will be raised. So, I absolutely do not suggest this for taxable accounts.
Is this just idle speculation or do you have a basis in fact for these statements?

Wagnerjb (Andy) actually made a strong case that the Spartan funds were loss leaders when I asked him the exact same question. It is in Rick Ferri's thread another poster referenced:

http://www.bogleheads.org/forum/viewtop ... oss+leader


That said, my Fidelity Spartan funds have held their low cost a lot more reliably than my Vangard funds. All but one of my VG funds are higher than when I decided to invest in them. My Fidelity stayed the same (even FSIIX that says they may raise it at any time, but they never have... knock on wood.)
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seugene
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Post by seugene »

MnD wrote:
seugene wrote: Unlike any Vanguard's funds, these things are definitely loss leaders for Schwab and Fidelity, so I think it is only a matter of time when ERs @ Fidelity and commissions and/or ERs @ Schwab will be raised. So, I absolutely do not suggest this for taxable accounts.
Is this just idle speculation or do you have a basis in fact for these statements?
Nah, just idle speculation, based only on many other bait-and-switches other companies performed.
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