Schwab Launches Extra-Cheap ETFs

One of the biggest advantages of Exchange-Traded Funds (ETFs) over traditional mutual funds is that ETFs usually cost much less to own because of the way ETFs are structured. Also helping to reduce the cost is that not before long, all ETFs are passively managed, meaning that they all track their respective index, minimizing the amount of research the fund manager has to do to select which equities to invest. Among big ETF players, Vanguard has been known for offering funds with rock-bottom fees, not just mutual funds (which most are index funds), but also ETFs, until now.

Early this week, Charles Schwab, who introduced Schwab S&P 500 Index Fund in May with 0.09% Expense Ratio (ER), launched its first batch of exchange-traded funds that are again featured with super-low expense ratios. Four ETFs debut this Tuesday are

  • Schwab U.S. Broad Market ETF (SCHB): Index - Dow Jones U.S. Broad Stock Market Index; ER - 0.08%
  • Schwab U.S. Large-Cap ETF (SCHX): Index - Dow Jones U.S. Large-Cap Total Stock Market Index; ER - 0.08%
  • Schwab U.S. Small-Cap ETF (SCHA): Index - Dow Jones U.S. Small-Cap Total Stock Market Index; ER - 0.15%
  • Schwab International Equity ETF (SCHF): Index - FTSE Developed ex-US Index; ER - 0.15%

So how are these ETFs compared against similar offerings from Vanguard?

  • Vanguard Total Stock Market ETF (VTI): ER 0.09%
  • Vanguard Large-Cap ETF (VV): ER 0.13%
  • Vanguard Small-Cap ETF (VB): ER – 0.15%
  • Vanguard Europe Pacific ETF (VEA): ER – 0.16%

Well, Schwab’s ETFs are cheaper, but the difference isn’t that significant (percentage wise it is) except the large-cap ETFs. However, the Vanguard funds have already established a track record (at least two years) in terms of returns. For the new funds at Schwab, there’s no way to evaluate the performance. So I won’t be jumping in any of these funds right away, despite the lower expense ratios.

In addition to the fee charged by the fund in the form of expense ratio, the other part of the cost of owning ETFs is the commission charged by brokers to invest in ETFs. Since ETFs are traded on exchanges the same ways as individual stocks are, buying and selling ETFs usually involve commissions, anywhere from $2.95 per trade to $10+ depending on which broker you are using. That’s why you can dollar-cost averaging mutual funds from fund providers (if you buy mutual funds from a broker, you may also have to pay a fee), but can’t DCA ETFs. However, there’s an exception for these Schwab ETFs if you also use Schwab as your broker because it appears that you can get these funds with zero commission. If you don’t have to pay any commission, then buying ETFs regularly with a small amount makes sense.

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