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The number of exchange traded funds with the “low-cost” label continues growing and advisors should note that this far from a Vanguard-only phenomenon.
For many advisors and their clients, Vanguard is, rightfully so, synonymous with low-fee ETFs and index funds, but other issuers are making their presences felt on the cheap fund front. That group includes Charles Schwab. In part, low fees explain why Schwab – a late entrant to the ETF business – is now the fifth-largest issuer in the space.
Its reputation for low-cost ETFs is something taken seriously by Schwab, as highlighted by the fact that the issuer announced fee cuts on two of its fixed income ETFs on Monday.
The new annual expense ratio on the Schwab U.S. TIPS ETF (SCHP) is 0.03%, or $3 on a $10,000 investment, down from 0.04% while the newly minted Schwab High Yield Bond ETF (SCYB) sees its fee fall to 0.03% from 0.10%.
Why It Matters
Obviously, the lower a fund’s fee, the more an investor keeps over the long-term. Alone, that’s reason enough to consider inexpensive funds and data confirm advisors are doing just that.
Specific to the latest Schwab fee reduction news, there are few highlights that are hard to ignore. First, the aforementioned SCYB debuted earlier this year and is seeing its expense ratio trimmed in a matter of months. Second, that rookie ETF now sports the lowest annual fee of any high-yield bond ETF on the market.
Third, with the fee cuts on SCHP and SCYB, all nine of Schwab’s fixed income ETFs have annual fees 0.03%. On a related note, SCHP and SCYB join not only the rest of their Schwab stablemates with 0.03% expense ratios, but a slew of other bond ETFs from rival issuers with that yearly levy as well. With the addition of SCHP and SCYB, 20 bond ETFs now have annual fees of 0.03%. Only the BNY Mellon Core Bond ETF (BKAG) is cheaper and that’s because it has no annual fee.
How Low Will ETF Fees Go?
Exluding BKAG, it appears that for now, 0.03% is the floor on bond ETF fees. Advisors and clients shouldn’t expect those expense ratios to get too much lower because there’s clearly not much room and issues need to make money, too.
Still, there’s plenty of room fixed income fees to decline, particularly if other issuers feel compelled to do so to keep pace with the Schwabs and Vanguards of the world.
““At Schwab Asset Management we are proud to continue our legacy of driving cost savings for investors with a focus on what is most meaningful to our clients,” said Nicohl Bogan, Director of Product Strategy and Development, Schwab Asset Management, in a statement. “Fixed income has been in the spotlight for investors in a higher interest rate environment. We have seized the opportunity to expand our fixed income offerings, recently launching high yield and municipal bond ETFs, while also helping investors save on fees.”
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