The exchange traded fund (ETF) industry has grown into a $1.4 trillion-dollar industry since the first fund was introduced 20 years ago. Increasingly popular with investors, ETFs are very attractive because they trade like stocks on a regulated exchange while providing diversity within a single investment product. Expense ratios for ETFs are typically significantly lower than those of their mutual fund cousins, further adding to their appeal. While ETFs boast low expense ratios, investors typically pay a commission - usually under $10 - to buy and sell ETFs.
Recently, brokerage Charles Schwab (NYSE:SCHW) announced the launch of Schwab ETF OneSource - an ETF platform that offers commission-free trading on 105 ETFs from six major ETF providers. The new ETF platform offers both investors and advisors the largest number of commission-free ETFs in the industry. Here, we will take a look at the Schwab ETF OneSource trading platform and what it means for retail investors.
Schwab ETF OneSource
The Schwab ETF OneSource trading platform, launched on Feb. 7, 2013, provides access to 105 ETFs with $0 online trade commissions. The list of 105 ETFs (available at www.schwab.com) spans key asset classes - including domestic and international equity, bond, sector, currency and commodities - with funds from leading providers Charles Schwab Investment Management, Guggenheim Investments, PowerShares, State Street SPDR® ETFs, ETF Securities, and United States Commodity Funds. There are definitely enough options to build an all-ETF portfolio. Peter Crawford, head of Schwab's Client Solutions group, clarifies the application and expected longevity of the commission-free structure: "Investors can trade in and out of these ETFs 100 times a day, and they won't pay a commission. This isn't a gimmick. There are no gotchas here. This is sustainable."
Schwab clients can access Schwab ETF OneSource through any of its online trading interfaces, including software, Web-based and mobile trading applications. Clients do not need to sign up to take advantage of the commission-free structure. Jim McCool, Schwab's Client Solutions executive VP, explains, "No paperwork is needed. It's automatic and simple. We already have clients today making trades without a commission."
Expense Ratios the Same
The "2012 ETF Investor Study by Charles Schwab" found that cost is the No.1 factor that investors consider when choosing ETFs. Those surveyed indicated that expense ratio is the top concern, followed by trade commissions. Almost 40% of participants said the ability to trade ETFs on a commission-free basis is either "most important" or "very important."
The commission-free structure has the potential to dramatically decrease the costs of using ETFs for retail investors. In addition to zero online trading commissions for the 105 ETFs, Walt Bettinger, CEO of Charles Schwab, emphasizes that Schwab clients who buy ETFs online through Schwab ETF OneSource will pay exactly the same operating expense ratios they would elsewhere, but without paying a commission.
Not the First
Schwab is not the first firm to offer commission-free ETF trading, and in fact, Schwab has previously offered commission-free trading on its own ETFs. The Schwab ETF OneSource trading platform, however, is the first to offer this many ETFs and without the restrictions that other commission-free programs place on investors. For example, TD Ameritrade offers commission-free trading on certain ETFs, but a $19.99 "short-term" trading fee applies if the ETFs are not held for at least 30 days.
The Fine Print
While it is true that investors can trade certain ETFs 100 times a day with no commission, it should be noted that the trades must be placed online in a Schwab account. Trades placed through a broker incur a $25 commission, and orders made by the automated phone system cost $5. In addition, certain types of transactions are not eligible for the commission waiver, including short sales and buys to cover (except for Schwab ETFs).
The Bottom Line
While other financial services firms offer commission-free ETF trading, the Schwab ETF OneSource trading platform offers the most ETFs with the fewest restrictions. Other ETF providers who do not have similar fee structures may be forced to move toward commission-free ETF trading or risk losing potential assets. For now, individual investors may be able to significantly reduce trading costs by using the Schwab ETF OneSource trading platform.
It is important to develop an ETF investing plan and consider all aspects of an investment before making any investment decisions. Cost alone should not determine the suitability of an investment.