Investment manager The Vanguard Group Inc. and broker Charles Schwab Corp. (SCHW) recently slashed rates of several key products, in what some investors have called a "race to the bottom" that will eventually undermine quality and service. The Vanguard Group announced a round of rate cuts on January 27, less than one month after the company lowered fees on 35 different funds, according to Barron's.
Competitors Cut Costs
Charles Schwab followed suit shortly after, announcing February 3 that it would reduce the expenses for its market-capitalization weighted index funds and lower the cost of trading stocks and exchange-traded funds (ETFs) through its online service, The Wall Street Journal reported. As a result of this, the financial institution's online service charges $6.95 for standard equity trades and $8.95 for ETF transactions. These new fees became effective November 3, and allowed Charles Schwab to charge less than its competitors, the broker stated. (For more, see also: Index Investing: Index Funds.)
The company announced that its Schwab S&P 500 Index Fund (SWPPX) and Schwab Small Cap Index Fund (SWSSX) will have fees of 0.03% and 0.06%, respectively, according to the Journal. These pricing changes will cost the broker around $15 million worth of lost revenue per month, according to Charles Schwab. Vanguard's recent rate cut is also expected to have a notable financial effect, saving investors $25 million, Barron's reported.
"A Race to the Bottom"
Financial institutions have been making these moves as the broader industry engages in a battle to win cost-conscious investors by lowering fees, according to Barron's. While moves like these raise the bar, any reductions in expense revenue will come along with a "cost to client service and efficiency," wrote Daniel Wiener, financial adviser and editor of The Independent Adviser for Vanguard Investors newsletter. (For related reading, see: How Are ETF fees deducted?)
Ben Johnson, director of global ETF research at Morningstar, Inc., offered a different point of view. While the latest fee cuts announced by Charles Schwab and Vanguard might motivate rival financial institutions to cut their costs, we are "drawing very near the logical conclusion of what's been a race to the bottom with respect to fees on broad market cap-weighted funds and ETFs," he told the Journal.
Instead of scrambling to save a basis point or two, investors might benefit from simply sticking with their existing funds, according to the Journal.