Schwab’s ETF innovation

By Felix Salmon
November 4, 2009
Ron Rowland is enthusiastic:

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Charles Schwab has an interesting new idea: ETFs which are commission-free for Schwab brokerage clients. Ron Rowland is enthusiastic:

Just as no-load no-transaction fee mutual funds changed the mutual fund landscape, commission-free ETFs will forever alter the way that ETFs are perceived. With this one change, nearly every argument in favor of mutual funds instead of ETFs goes away. Dollar cost averaging? No longer costly with commission-free ETFs. Small account size? Not a problem anymore.

This isn’t entirely true. There are two main costs involved when you buy or sell equities, including ETFs. One, yes, is the commission. But the other is the bid-offer spread. And if the new Schwab funds remain relatively small and illiquid, it’s still going to be a bad idea to buy them, just as it’s a bad idea to buy any ETF with less than a billion dollars or so in assets.

That said, Schwab is big enough that it should be able to get there pretty quickly. And at that point, if you’re a Schwab client, these things will look very attractive indeed.

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Comments
2 comments so far

two words: vendor lock

i have the same vendor lock issue with fidelity’s mutual funds.

Posted by q | Report as abusive

RE: Small ETFs

I don’t understand the reasonings for avoiding small ETFs. Yes, I agree they are usually illiquid and so often have wide bid/ask spreads and that is a reason to avoid. But, your reasoning in the PCY post is puzzling. Avoid them because they can be pushed by large panic sellers? That seems like a great opportunity rather than a problem. Panic can push the ETF significantly below its NAV. However, panic is temporary. You get to buy it at a discount and make a fortune when the panic subsides. Check out the chart of PCY since your post. The price fell of a cliff, but has since fully recovered.

Posted by JackL | Report as abusive
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