Charles Schwab May Benefit From the Shift to Low-Cost Investments

With the exchange-traded funds (ETF) market becoming an important area for discount brokers, those with the lowest costs associated with their funds are the most in demand. According to data compiled by Bloomberg, of the $738 billion invested in index funds and ETFs during the last 12 months, $509 billion went to funds that had fees of 0.1 percent or less.

That bodes well for Charles Schwab Corp (SCHW) given it has a slew of low-cost investments and announced earlier in October a new ETF that has an operating expense ratio of 5 basis points of 0.05%. The new fund started trading on Oct. 11 and is available via Schwab's commission-free ETF program. Charles Schwab said in the announcement the expense ratio is one-half to one-third cheaper than other ETFs that track the biggest 1,000 U.S. stocks.

During the course of the year, the San Francisco brokerage firm has slashed commissions on all sorts of investments including stocks, ETFs and mutual funds, and has benefited as a result. It currently offers 22 low-cost ETFs, and its commission-free ETFs number in the 200 range. According to Investor’s Business Daily, Schwab’s ETF OneSource program has brought in $18 billion in new ETF flow in 2017 alone, accounting for 51% of its total ETF flow.

But those aren’t the only data points to underscore how important it is for discount brokers to keep their ETF fees low. According to ETF Trends, Charles Schwab had  ETF assets of $380 billion at the end of September, up from $292 billion in the same period a year ago, marking a 30% year-over-year increase. Schwab’s registered investment advisor clients had ETF assets of $201 billion in September, up 31% from the $154 billion at the end of September 2016, a record one-year jump for the firm. Retail investors' ETF assets jumped 27% to $132 billion from $104 billion while retail traders ETF assets increased 37% to $47 billion from $34 billion, noted ETF Trends.

Even in ETF advice, Schwab is undercutting its rivals and winning as a result. According to the Bloomberg data, the company has lured $23 billion to Intelligent Portfolios, its online service in which it will develop a portfolio of ETFs for customers free of charge. According to Bloomberg, most advisers charge a one percent fee for the same service. For its third-quarter, Charles Schwab said it opened 216,000 new retail brokerage accounts, which is up 29% from last year’s third quarter.  Total client assets increased 17% to $3.18 trillion and core net new assets jumped 72% to $51.6 billion.