September 21, 2012 / 3:50 PM / 5 years ago

UPDATE 2-Schwab cuts fees on ETFs in bid for market share

* Schwab cuts fees across entire family of ETFs

* Cuts range from 59 percent to 17 percent

* Schwab oversees $7.2 bln in ETFs, fraction of leading firms

* Competitors point to Schwab’s higher bid/ask spreads

Sept 21 (Reuters) - Discount broker Charles Schwab Corp cut fees on its exchange-traded funds, seeking to gain market share for a three-year old product line that has badly lagged competitors.

Fees were slashed as much as 59 percent across Schwab’s U.S. equity, international equity and bond ETFs starting Sept. 20, according to filings with the Securities and Exchange Commission. For example, the fee on the Schwab U.S. Dividend Equity ETF dropped to 0.07 percentage point from 0.17 point previously.

The move comes as low-priced ETF leader Vanguard Group has been gaining market share from higher-priced rivals. BlackRock , the biggest ETF manager, said earlier this month it planned to cut fees on some of its funds to compete better against Vanguard.

“I don’t think there is any denying that the ETF market is competitive,” Schwab President and Chief Executive Walt Bettinger said on a call with reporters on Friday. But the price cuts were approved over the summer and were not made in direct response to expected reductions on other firms’ ETFs, he said.

Like mutual funds, ETFs typically own a basket of assets such as stocks or bonds. But unlike mutual funds, which are priced only once a day, ETFs trade continuously on an exchange and reprice in real time.

Investors should benefit from the cuts by Schwab and any follow-on moves by competitors across the $1.5 trillion global ETF market. But the benefits will be relatively small since ETF fees are already so low. The cut on Schwab’s dividend fund, for example, would save an investor just $10 a year on a $10,000 investment.

“This positions Schwab as committed to being the low-cost leader wherever they can,” said Dave Nadig, director of research at IndexUniverse, an ETF analysis firm. “Ultimately, that’s good for them and good for investors.”

San Francisco-based Schwab said it managed $7.2 billion in ETFs at the end of August, a fraction of the amounts overseen by market leaders. BlackRock’s iShares unit oversaw $644 billion at the end of July, State Street $240 billion and Vanguard $216 billion, according to ETFGI LLP, a fund research firm based in London.

Competitors noted that investors bear other costs with ETFs beyond the management fee. Vanguard ETFs more closely track their underlying indexes and cost less to trade when measured by bid and ask spreads, Vanguard spokesman John Woerth said.

For example, the fee on the Vanguard Total Stock Market ETF is 0.06 percentage point versus 0.04 point on the Schwab U.S. Broad Market ETF. But an investor would give up 0.05 point to buy and then sell the Schwab fund versus 0.02 point for the much more frequently traded Vanguard fund.

Shares of Charles Schwab gained 16 cents, or 1.2 percent, to $13.60 in afternoon trading on the New York Stock Exchange. The shares had gained 19 percent so far this year, outpacing the 16 percent price gain of the Standard & Poor’s 500 Index.

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