- (0:30) - ETF Trend: Low Cost Battle
- (1:45) - Why Is Charles Schwab Focused On Low Cost?
- (3:50) - Charles Schwab's Commission Free Trading Program
- (5:00) - How Are These Funds Able To Have Costs So Low?
- (8:20) - Episode Roundup: Podcast@Zacks.com
Passive investing is absolutely dominating the world of ETFs, and the finance landscape in general.
This style of investing already accounts for six trillion dollars in global assets, and is expected to pass active management’s market share by 2024 at the latest. Clearly, this is a big trend in the investing world, but which companies look to be the winners from this push?
In today’s podcast, I talk about my opinion on the subject, noting the discussion needs to focus on the providers of low-cost ETFs, and this begins and ends with Charles Schwab (SCHW). Schwab has made cheap funds a priority, and the company thoroughly dominates the list of low-cost passive ETFs, providing investors with roughly half of the cheapest ETFs in the U.S. market today. This also includes two ETFs on the market that charge just three basis points a year in fees, SCHX and SCHB, as well as the cheapest bond ETF by expense ratio, SCHZ, too.
A Closer Look
As you might expect, investors have gravitated towards these low-cost funds, and especially considering Schwab offers commission-free trading on its lineup too. To get some insights on the success of the commission-free program, why it is important to have the lowest cost product, and why Schwab is zeroing-in on this approach, I spoke with Jonathan de St. Paer, the Head of Product Management and Strategy for Charles Schwab, to get his take on the company’s strategy.
Jonathan offered up his thoughts on this topic, and why this approach has helped Schwab to make a name for itself in the low-cost investing world, despite being a relative latecomer to the ETF space. We also talk about Schwab’s recent cuts to fees, and their move to slash trading costs in general too, and how this fits in with the overall Schwab strategy.
How is This Possible?
But given all these rock-bottom costs, investors have to be asking how Schwab is making any money at all off of this program?
To me, it seems like a case of a ‘loss-leader’ for Schwab, or at least a way to attract new investors and keep them in the Schwab system. Some might call it the Amazon (AMZN) model of investing.
For Amazon Prime, the company sucks you in with low costs, often losing money or breaking even on some products to get you in the door. But, once you are stuck in the ecosystem, Amazon has the ability to sell you other products, many of which are higher margin, or at least keep you focused on buying from their platform for more and more of your needs (also read How Charles Schwab is Becoming the Amazon of Investing).
It seems like Schwab is willing to sell ETFs and mutual funds at an ultra-cheap rate in order to get people in the door and attract new customers to the Schwab platform. And with low-costs that are only available to Schwab customers, switching costs are high and many are likely to stay, just like what we see with Amazon.
But unlike Amazon, Schwab has one thing going for it that you only get in the world of finance, and that is the strong possibility of rising rates. The more customers Schwab can pull in and keep in its system, the higher its float. And the bigger the float, the more money Schwab can make off investing that capital in extremely short-term securities. In other words, any losses that might come from lower costs could be offset—and more—by investing securities in a higher rate world in the future.
This is something that most of the other ETF providers cannot match. Companies like iShares can’t really compete with this model, while smaller firms like WisdomTree stand no chance in this cutthroat low-cost world. That is why I expect Schwab to continue to lead the way in low-cost investing, and to remain at the top of the leaderboard for passive investors.
But make sure to check out the podcast for more of my thoughts on this topic, and quotes from Schwab regarding the low-cost passive investing trend too.
Bottom Line
Low cost funds are dominating the world of ETFs, and I don’t think this movement is going to go away any time soon, especially with how it could fit in to Schwab’s business model. Expect Charles Schwab to continue leading this market, and for the people at Schwab to make it tough for the rest of the space to keep up in the years ahead too.
But what do you think about the world of low-cost ETFs and this departure from the traditional interview segments we have been doing for the Dutram Report? Make sure to write us in at podcast @ zacks.com or find me on Twitter @EricDutram to give us your thoughts on this, or anything else in the ETF market.
But for more news and discussion regarding the world of ETFs, make sure to be on the lookout for the next edition of the Dutram Report (each and every Thursday!) and check out the many other great Zacks podcasts as well!
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>
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Why Schwab Will Dominate the World of Low-Cost ETF Investing
Passive investing is absolutely dominating the world of ETFs, and the finance landscape in general.
This style of investing already accounts for six trillion dollars in global assets, and is expected to pass active management’s market share by 2024 at the latest. Clearly, this is a big trend in the investing world, but which companies look to be the winners from this push?
In today’s podcast, I talk about my opinion on the subject, noting the discussion needs to focus on the providers of low-cost ETFs, and this begins and ends with Charles Schwab (SCHW). Schwab has made cheap funds a priority, and the company thoroughly dominates the list of low-cost passive ETFs, providing investors with roughly half of the cheapest ETFs in the U.S. market today. This also includes two ETFs on the market that charge just three basis points a year in fees, SCHX and SCHB, as well as the cheapest bond ETF by expense ratio, SCHZ, too.
A Closer Look
As you might expect, investors have gravitated towards these low-cost funds, and especially considering Schwab offers commission-free trading on its lineup too. To get some insights on the success of the commission-free program, why it is important to have the lowest cost product, and why Schwab is zeroing-in on this approach, I spoke with Jonathan de St. Paer, the Head of Product Management and Strategy for Charles Schwab, to get his take on the company’s strategy.
Jonathan offered up his thoughts on this topic, and why this approach has helped Schwab to make a name for itself in the low-cost investing world, despite being a relative latecomer to the ETF space. We also talk about Schwab’s recent cuts to fees, and their move to slash trading costs in general too, and how this fits in with the overall Schwab strategy.
How is This Possible?
But given all these rock-bottom costs, investors have to be asking how Schwab is making any money at all off of this program?
To me, it seems like a case of a ‘loss-leader’ for Schwab, or at least a way to attract new investors and keep them in the Schwab system. Some might call it the Amazon (AMZN) model of investing.
For Amazon Prime, the company sucks you in with low costs, often losing money or breaking even on some products to get you in the door. But, once you are stuck in the ecosystem, Amazon has the ability to sell you other products, many of which are higher margin, or at least keep you focused on buying from their platform for more and more of your needs (also read How Charles Schwab is Becoming the Amazon of Investing).
It seems like Schwab is willing to sell ETFs and mutual funds at an ultra-cheap rate in order to get people in the door and attract new customers to the Schwab platform. And with low-costs that are only available to Schwab customers, switching costs are high and many are likely to stay, just like what we see with Amazon.
But unlike Amazon, Schwab has one thing going for it that you only get in the world of finance, and that is the strong possibility of rising rates. The more customers Schwab can pull in and keep in its system, the higher its float. And the bigger the float, the more money Schwab can make off investing that capital in extremely short-term securities. In other words, any losses that might come from lower costs could be offset—and more—by investing securities in a higher rate world in the future.
This is something that most of the other ETF providers cannot match. Companies like iShares can’t really compete with this model, while smaller firms like WisdomTree stand no chance in this cutthroat low-cost world. That is why I expect Schwab to continue to lead the way in low-cost investing, and to remain at the top of the leaderboard for passive investors.
But make sure to check out the podcast for more of my thoughts on this topic, and quotes from Schwab regarding the low-cost passive investing trend too.
Bottom Line
Low cost funds are dominating the world of ETFs, and I don’t think this movement is going to go away any time soon, especially with how it could fit in to Schwab’s business model. Expect Charles Schwab to continue leading this market, and for the people at Schwab to make it tough for the rest of the space to keep up in the years ahead too.
But what do you think about the world of low-cost ETFs and this departure from the traditional interview segments we have been doing for the Dutram Report? Make sure to write us in at podcast @ zacks.com or find me on Twitter @EricDutram to give us your thoughts on this, or anything else in the ETF market.
But for more news and discussion regarding the world of ETFs, make sure to be on the lookout for the next edition of the Dutram Report (each and every Thursday!) and check out the many other great Zacks podcasts as well!
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>