Schwab unveils no-fee platform for exchange-traded funds

NEW YORK Thu Feb 7, 2013 12:29pm EST

NEW YORK (Reuters) - Charles Schwab Corp (SCHW.N) is waiving transaction fees on exchange-traded funds, the online brokerage said on Thursday, applying to increasingly popular ETFs the formula it used to sell mutual funds to the masses.

Schwab, which ended 2012 with $223.2 billion of client money in its OneSource no-fee fund platform, said that after months of negotiating with providers, it is launching a similar platform for ETF products. There will be 105 ETFs on the new commission-free platform, called Schwab ETF OneSource.

ETFs, unlike mutual funds, are listed on exchanges and can be traded throughout the day. Mutual funds are valued once a day after the stock market closes.

The offerings will "span major asset classes, with funds from leading providers, including State Street SPDR ETFs, Guggenheim Investments, PowerShares, ETF Securities, United States Commodity Funds, and Charles Schwab Investment Management," the company said in a release Thursday. BlackRock's iShares ETFs and Vanguard ETFs do not appear to be among the platform's offerings.

Schwab will charge fund providers a percentage of the assets that clients purchase through Schwab. The San Francisco-based brokerage charges most mutual fund providers a hefty .40 percent of the money they collect from its clients..

Schwab has had a harder time convincing ETF providers to pay for shelf space because one of the advantages of ETFs is lower costs than mutual funds. As first reported by Reuters in December, Schwab has been trying for months to recruit ETF providers for its new platform.

"Payments to brokerage platforms have been a staple of mutual funds for some time but there is simply less money to go around in ETFs because expense ratios are lower," said Dave Nadig, research director at Index Universe, a consulting firm. "I'm challenged to see how an ETF with an expense ratio of just seven to eight basis points (0.05 to 0.08 percent) could afford it."

Some financial advisers say that they avoid no-fee platforms because the expenses that funds have to pay are passed along through operational expenses that lower investor returns.

However, the so-called fund supermarkets pioneered by Schwab and now offered by competitors such as TD Ameritrade Holdings (AMTD.N), Fidelity Investments and E*Trade Financial Corp. ETFC.N have been popular and lucrative for the brokers.

Some of those companies have worked out one-on-one agreements to market exchange-traded funds.

Fund giant BlackRock Inc. (BLK.N), for example, pays to get exclusive positioning in the Fidelity system and gives salespeople so-called 12b-1 fees to market them. Most ETFs don't charge 12b-1 fees.

E*Trade last year started offering commission-free ETFs from WisdomTree Investments Inc (WETF.O), Global X and Deutsche Bank AG (DBKGn.DE). The companies would not disclose the marketing fees.

Schwab is by far the leader in selling mutual funds to investors. However, fund companies at first balked at paying what was then a 0.25 percent marketing fee when the brokerage launched OneSource two decades ago. OneSource now generally charges 0.40 percent to fund companies for their listings.

Though funds are still unhappy with what they view as the high listing expense at Schwab and competitors. Several thousand of funds are now listed on OneSource and other no-transaction-fee platforms, however, because they have become a core part of the fund sales landscape.

(Reporting By Jed Horowitz and Jessica Toonkel; Editing by Dan Grebler, Jennifer Merritt and David Gregorio)

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