By Jed Horowitz and John McCrank
NEW YORK Feb 7 Charles Schwab Corp is
waiving transaction fees on exchange-traded funds, the online
brokerage said on Thursday, applying the formula it used to sell
mutual funds to the masses to increasingly popular ETFs.
Schwab ended 2012 with $223.2 billion of client money in its
OneSource no-fee mutual fund platform, which includes over 4,000
funds. The San Francisco-based company said that after months of
negotiating with providers, it was 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, highlighting
six providers: State Street SPDR ETFs, Guggenheim Investments,
PowerShares, ETF Securities, United States Commodity Funds, and
Schwab's own investment management arm, the company said.
The program extends the "very aggressive pricing strategy"
introduced last year when the firm unveiled Schwab-sponsored
ETFs at no commission, Chief Executive Walt Bettinger said in a
presentation to analysts on Thursday.
$150 BILLION CATEGORY
While stock trading directly and through mutual funds
declined strongly last year, ETFs of equities and other
securities continued to be a popular investment vehicle for both
individual investors and their advisers.
"In the fourth quarter of last year, we had $18 billion of
flows into ETFs, so even in this challenging environment we
continue to see more and more interest in ETFs," said Peter
Crawford, Schwab's head of third-party platforms.
Fears that the popularity of ETFs are eating into Schwab's
huge mutual fund marketplace are unfounded, said Joseph
Martinetto, the company's chief financial officer, though they
are cannibalizing direct investment into stocks.
Schwab began offering in-house managed ETFs in late 2009 to
compete with industry leaders BlackRock Inc, Vanguard
Group and State Street Corp,and are approaching $10
billion in assets, making Schwab the No. 9 U.S. ETF provider.
Add in ETF assets custodied by Schwab for advisers, and the
funds are a $150 billion category for the company.
Schwab, the leader in selling mutual funds to retail
investors, charges fund providers a percentage of the fund
assets that its clients purchase from its "platforms." When it
introduced OneSource two decades ago, funds balked at paying
what was then a 0.25 percent marketing fee. OneSource now
generally charges 0.40 percent to fund companies for their
Though funds are still unhappy with what they view as the
high listing expense at Schwab and competitors, thousands are
now listed on OneSource and other no-transaction-fee platforms,
because they have become a core part of the fund sales
landscape. Fund companies have long complained about the hefty
0.40 percent fee they pay to sell funds through the
"supermarkets" owned by Schwab and competitors but say they
cannot afford to ignore the popular distribution centers.
Bettinger declined to say what Schwab was charging ETF
providers, characterizing it as "appropriate compensation for us
relative to the servicing we provide and the commissions we
waive." The fee comes straight from the ETF adviser, not out of
the pockets of investors, he emphasized.
PAYING FOR SHELF SPACE
Schwab has had a hard time convincing ETF providers to pay
for shelf space because the funds are marketed as having much
lower costs than their mutual fund cousins. As first reported by
Reuters in December, it has been working for months to recruit
ETF providers to the embryonic 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 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 fund supermarkets pioneered by Schwab and now
offered by competitors such as TD Ameritrade, Fidelity
Investments and E*Trade Financial Corp 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., 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. Fidelity offers 30 ETFs on a
E*Trade last year started offering commission-free ETFs
from WisdomTree Investments Inc, Global X and Deutsche
Bank AG. The companies would not disclose the
TD Ameritrade offers a commission-free ETF platform that
lists more than 100 funds.
In a related area, Bettinger said the company has delayed
plans to introduce a platform of ETFs into employee retirement
plans that it manages.
The program, which will allow employees saving for
retirement to buy fractional shares in ETFs, was supposed to
have been unveiled this year but has proven "more complicated"
to design than expected, he said. Companies should be able to
use what he called the first "true ETF 401(k)" platform in 2014,