Since late 2009, there's been a revolution in the way that online brokers do business. With the huge rise in popularity of exchange-traded funds, brokers saw an opportunity to deliver much-wanted products in order to attract new customers and their money.
But, as most of the major brokers and ETF companies have staked their claims within the industries, the skirmishes are now fewer and farther between. Later in this article, I'll talk about the latest shot in the next phase of the broker wars. First, though, let's review where we've been and who the major players are.
Where we've been
It's been two and a half years since Schwab (NYSE: SCHW ) fired the first shot in what would become an industrywide race of brokers to offer commission-free ETFs. Schwab went with proprietary in-house funds, while Fidelity answered shortly thereafter with a partnership with BlackRock's (NYSE: BLK ) iShares unit to offer more than two dozen of its industry-leading funds. Vanguard offered its own ETFs without commission, while TD AMERITRADE (NYSE: AMTD ) crafted a set of more than 100 funds from multiple vendors.
Gradually, the remaining brokers found ETF solutions. Scottrade went with FocusShares, while E*TRADE Financial (Nasdaq: ETFC ) paired off with WisdomTree and Global X offerings. That leaves most of the discount brokers with free-ETF arrangements of some sort, leaving the field well defined.
Fighting on fees
But behind the scenes, there's been another battle going on. Vanguard has long had a reputation for providing low-cost mutual funds and ETFs. But as Schwab has come out with its own proprietary funds, it has chosen to take Vanguard head-on in what matters most to its investors: price. Several of Schwab's ETFs undercut Vanguard's similar ETFs, claiming the title of lowest-cost provider.
That's the backstory behind the latest move from Vanguard to cut its fees on more than three dozen of its mutual funds and ETFs. The drops are minuscule -- just a single hundredth of a percentage point for the Vanguard Total Stock Market ETF (NYSE: VTI ) , and similarly small increments for the other ETFs and mutual funds where Vanguard is cutting.
It will be interesting to see whether Schwab makes further cuts in order to follow suit. It has gone to some trouble to claim the status of lowest-cost ETF in some fund categories, and it won't want to lose that status without a fight.
It's not a fight!
Meanwhile, Vanguard argues that it isn't engaged in any sort of price war. Rather, because of its fund structure whereby fund shareholders are effectively the owners of the funds, Vanguard argues that increasing efficiencies allow it to pass savings on to its shareholders.
Technically, that may be true. But being able to claim low-cost status has definite marketing advantages that translate to more assets under management. And with billions of dollars at stake, you can expect the parrying back and forth to continue.
Lower costs are good
At this point, the differences between Schwab's and Vanguard's fees are so small that unless you have a huge ETF portfolio, you might well decide the savings aren't enough to justify switching. On a $10,000 investment, the single basis-point difference amounts to $1 per year.
But the fencing between the two broker/ETF providers highlights how big a difference there is between their fees and those of many of their competitors. With nearly all ETFs doing nothing more than tracking an index, you'd think that fees that in some cases are 10 times or more what you'd pay for Vanguard's or Schwab's basic stock market index fund would be excessive. Until you rally for change by sending your hard-earned money to investments where it will work the hardest, you'll pay too much in fees.
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