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Schwab Brings a Game Changer to the Market, Part II


schwab_etf.jpgSchwab had me already at “no commission”, on their new family of Exchange Traded Funds.

Then I took a closer look, and was astonished to see that their expense ratio was not only well below the fees charged by I-Shares and SPDRs—but also matching Vanguard on three of their offerings.

In fact, Schwab is the second lowest cost provider on only one fund (Emerging Markets) while actually besting Vanguard and the other two on four of their eight new funds.

Clearly, the goal was not to maximize profits, but to capture market share.

They need to get up to scale quickly so that they can sustain volume and liquidity to keep the spreads as narrow as the competition.

The first four funds hit the market the first week in November, so results are premature at this early juncture.

They include:

SCHB:  Schwab U.S. Broad Market

This is Schwab’s version of a total U.S. Market, all cap index.  Their bogey is the 2,500 stock Dow Jones U.S. Broad Market Index.  The other firms use either the Wilshire 5000 index or the Russell 3000 index, but there is not a significant variation in coverage.

SCHX:  Schwab U.S. Large-Cap

The index tracked is the Dow Jones U.S. Large-Cap total Stock Market Index, made up of the largest 750 U.S. Stocks.  Both SPY and IVV, the dominant offerings for this category, track the S&P 500, each charging a slim 0.09% expense ratio.

Schwab cuts the rate to 0.08%, and it will be interesting to see if the big boys lower their rate to try to snuff out the upstart contender.

SCHA:  Schwab U.S. Small-Cap

The index used is the Dow Jones U.S. Small-Cap Total Stock Market Index, which consists of the 1,750 U.S. small cap stocks (arrived at when you subtract the 750 large cap stocks from the 2,500 Total Stock Market index)

SCHF:  Schwab International Equity

The sole international ETF (until December, at least) tracks the FTSE (Financial Times of London) Developed ex-U.S. Index, consisting of approximately 1,400 Large and Mid-Cap companies domiciled in over 20 developed international markets.   This is similar to the EAFE (Europe, Austral-Asia, Far East) index used by competitor ETFs.

Again, there is nothing unique about the coverage.  The distinction is in the lack of trading commissions and rock bottom expense ratios.

Absolute heaven for tightwad investors like me.

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