The Charles Schwab Corporation (SCHW) has announced a massive fee diminution on 15 of its exchange-traded funds (ETFs). The fee reduction catapults the company's position in the ETF market as the one with the lowest operating expense ratio (OER) in their respective Lipper categories.
Charles Schwab has decreased fees in the range of approximately 17%-59% across its U.S. equity, international equity and bond ETFs. The new fee structure has come into effect from the 20th September, as per the filings with the Securities and Exchange Commission.
ETF market is one of the fastest growing and highly promising markets for generating good returns. Therefore, many companies have shown tremendous interest in these. Similar to mutual funds, ETFs have a plethora of assets such as stocks and bonds. However, in contrast to mutual funds, which are priced only once a day, ETFs trade continuously on an exchange and reprice in real time. This makes trading very lucrative for the investors as well as the company.
Apart from Charles Schwab, a number of companies including BlackRock, Inc. (BLK) have slashed ETF fees in the recent months. Moreover, Vanguard Group - the market leader with its low priced ETFs - is forcing smaller participants like Charles Schwab to cut down on fees. This is ultimately leading to a kind of price war, in which the investors stand to benefit the most.
Earlier, in 2009, Charles Schwab had kicked off a similar price war, when it became the first major brokerage firm to provide commission-free ETF trading online. This prompted several other companies including E*TRADE Financial Corporation (ETFC), TD Ameritrade Holding Corporation (AMTD) and Vanguard to follow the suit.
However, it must be mentioned that these price cuts do look very tempting, but the fees on ETFs are already very low. Therefore, impact from the price cut would not be as beneficial as it looks.
Given the gloomy economic scenario, company's financials will continue to be hampered by lower trading activities, weaker equity markets and reduced interest rate yields. Therefore in order to further diversify its revenue stream, Charles Schwab is keen on taking the advantage of the rapidly growing ETF industry, which will increase its market share and boost its profitability in the future.
Charles Schwab currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.