February 7, 2013 / 5:27 PM / 5 years ago

UPDATE 2-Schwab unveils no-fee platform for exchange-traded funds

By Jed Horowitz and John McCrank

NEW YORK, Feb 7 (Reuters) - 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.


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 listings.

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.


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 commission-free basis.

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 marketing fees.

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, he said.

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