Charles Schwab Corp.'s (SCHW) news that it is undercutting its rivals with its latest exchange-traded fund (ETF), the Schwab 1000 Index ETF, sent shares surging late last week, setting a new all-time high for the discount broker.
While cut-throat pricing typically spooks investors who then fear a price war is about to break out that isn’t the case with San Francisco-based Schwab. Given it is relatively new in the world of ETFs and the fact that slashing prices has served it in the past, investors seem to be applauding the move, which drove the stock higher. On Friday, Schwab closed at $45.40, setting a new all-time high. The stock, which has been climbing since the start of September, is up 10% so far in 2017 based on its closing price Friday. Recently, shares of Schwab were down $0.04 or 0.09% to $45.30 on what appears to be a bit of profit-taking.
Last week, the discount brokerage announced that starting Oct. 11, customers can invest in the new ETF, which provides investors with a low-cost way to get exposure to the 1,000 largest stocks in the U.S. It has an operating expense ratio of 5 basis points, or 0.05%, and will be made available through the company’s commission-free ETF program. Charles Schwab said in an announcement the expense ratio is one-half to one-third cheaper than other ETFs that track the 1,000 biggest U.S. stocks. According to Barron’s, the expense ratio is lower than the BlackRock Russell 1000 ETF, the Vanguard Russell 1000 ETF and State Street's SPDR Russell 1000. The new ETF’s expense ratio is half that of the SPDR Russell 1000 ETF, which Barron’s said is the lowest priced of the three.
While lower expense ratios and free commissions means less revenue for Schwab, it's also a way for the company to grow its position in that part of the investment world, which is exploding. According to ETF.com, in June alone $45.5 billion of new money was invested in ETFs. For the first half of the year, inflows stood at $249.4 billion, nearing the $287.5 billion of inflows for all of 2016. Total assets under management for ETFs listed in the U.S. stood at a little less than $3 trillion as of the end of June.
Schwab is currently in fifth place in the ETF market, which means it has a lot of room to grow and can do that by offering the lowest expense ratio in the industry. In general, ETFs don’t make a lot of money for the brokerage firms because of the low costs associated with them, but are a must for any online brokerage. Because of their cheap nature, investors fret when brokerages try to lowball each other on the expense ratio. The same can’t be said of actively managed fund or stock trading commissions.
Because Schwab is expanding its ETF offering, it is making it an even more important player in online investing. The company is also slated to report third-quarter earnings later this month, and Wall Street is expecting it to post growth in earnings and revenue compared to a year ago. If Schwab is able to deliver or surpass Wall Street views it could send the stock even higher. If it underperforms, investors may need to brace for some declines in what is turning out to be a high-performing stock so far in 2017.