Charles Schwab wants to get into the index fund and ETF business. Badly!
In doing so, Schwab has created a series of funds to undercut the industry leader — Vanguard — by offering the lowest expense ratio ETFs and index funds on the market. With an expense ratio as low as 0.08%, these funds even undercut the ultra cheap Vanguard Admiral Shares (for accounts $100k and over).
Taking it one step further, Schwab will also allow the cost conscious investing crowd (e.g. you and I) to trade their ultra cheap ETFs commission free.
So not only do you get commission free trades (made popular by Zecco Trading), but you also get the lowest cost, broadly diversified ETFs on the market.
You got to love free market competition!
If you’re a Vanguard investor (like I am), and you’re looking at the ETFs or index funds within your passive investing portfolio that are charging double or triple what Charles Schwab is charging, the cost conscious shopper in you might begin to question why you’re still hanging around.
The only problem is, you can’t start selling everything in your Vanguard account and rush over to Charles Schwab without considering the tax implications, or the pros and cons of investing in ETFs. If you’ve had a Vanguard account for a number of years, you have likely dollar cost averaged into a number of different funds creating a fairly sizable account.
Selling any of these funds would open you up to capital gains taxes and you could lose more in taxes than you would save by moving to a cheaper fund.
If you’re a Schwab 2% cash rebate credit card holder, this change in ETF pricing and commission free trading might be right up your alley.
As a card holder, your 2% cash back rewards are credited to your Schwab brokerage account every month. If you’re the big spender type or don’t use a rewards debit card, this can add up to decent amount of cash after a few months.
The only problem was, if you earned $100 or $200 in “free money” after a few months of spending, you’re still paying a substantial portion of your cash back rewards on a lousy commission fee just to invest in XYZ stock, ETF or index fund.
By allowing brokerage account holders to trade Schwab ETFs for free, Schwab is able to hang on to those customers who were siphoning off their cash back rewards out of their brokerage account and putting it to use somewhere else.
So it’s a win-win. Schwab gets your long term business at an 0.08% expense ratio, and you get free trades on free money! (Note: this doesn’t work unless you pay your balance in full every month.)
For those interested in making the side by side comparisons, take a look below at the Schwab ETF and index fund expense ratios posted below. Looks like Schwab wins hands down.
Other than DRIPs investing, the Schwab ETFs and commission free trades might be the cheapest way to invest in the market.
– Expense ratios taken on 11/06/2009.