The folks at Schwab have recently made some changes to the financial parameters of their index funds, which I think will benefit not only the company but also its customers.
Permit me to back up a bit, though, and remind readers of the Fool's advice that the average investor would do rather well to invest in a broad-market index fund, which will instantly plunk them into the likes of ExxonMobil (NYSE:XOM), AT&T (NYSE:T), Wal-Mart (NYSE:WMT), and Hewlett-Packard (NYSE:HPQ). These funds tend to outperform most other mutual funds, and they're very easy to use. (Even Warren Buffett has recommended them.)
The only problem is that they're not all alike. Well, they tend to be almost identical in their holdings, copying the holdings of the index they track, but their fee structures vary widely. As an example, my Foolish colleague Brian Richards reported about an index fund that he called "the worst investment I've ever seen."
What's the best index fund around? One that we've often pointed to has been the Vanguard S&P 500 (FUND:VFINX) index fund, with its ultralow expense ratio (annual fee) of 0.16%. (Brian's fund charged 0.62%, plus a 5.5% sales load!) The Vanguard fund's main drawback was a $3,000 minimum investment. To get around that, we'd sometimes mention SPDRs (NYSE:SPY), which are exchange-traded funds (ETFs) that track the S&P 500 and charge just 0.09%.
Schwab gets bold
Enter Schwab. It has now overhauled all its stock index funds, giving each a minimum investment requirement of just $100, and lowering the expense ratio for its Schwab S&P 500 Index Fund (SWPPX) to just 0.09%. That's right. It's giving Vanguard a run for its money. It's even become competitive with SPDRs, since customers can invest in Schwab funds with no commission cost, unlike ETFs, which usually incur brokerage commission fees.
This seems like a very smart move for the company. Yes, it's giving up some income by lowering its fees. But the move is likely to bring in many more customers, and it's serving these customers more effectively.
If you want to aim higher than an index fund, by using carefully selected managed mutual funds, try our Motley Fool Champion Funds newsletter, for free, for some suggestions.
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