CHICAGO (Reuters) – Exchange-traded index funds are a bit like mobile phones — models offer an increasing array of features over time, while prices on even the plain-vanilla models keep falling.
So, in step, prices have been dropping lately on garden-variety ETF index expenses. Typically these have offered rock-bottom costs on most products, relative to actively managed mutual funds. Yet there are several components of ETF pricing, so you need to be careful. You could miss some of the nuances and pay more than you should.
The good news is that competition is forcing expense ratios down to near-institutional-pricing levels. Now you can pay roughly what big money managers do for entire baskets of stocks, bonds and other vehicles. (An expense ratio is what a money-management firm charges you every year for owning their ETFs — a percentage based on assets under management. Generally, the lower the expense ratio, the better, since more of your money is being invested and not going into the manager’s pocket.)
The latest salvo of price cuts came from the discount broker Charles Schwab, which recently reduced fees by up to 59 percent on its 15 ETFs, which hold more than $7 billion in assets. Schwab is trying to play catch-up with the three giants in the field — Blackstone/iShares, State Street’s SPDRs and Vanguard Group — which offer an even wider selection of low-cost ETFs.
Expenses on Schwab funds range from 0.04 percent for its Multi-Cap Core Fund to 0.20 percent for its International Small/Mid-Cap Growth fund. How does that compare with previous levels? Expenses on the Mid-Cap ETF were cut in half, from 0.13 percent to 0.07 percent, while others were trimmed by as little as 0.02 percentage points.