Charles Schwab Shakes Things Up!

It may be fitting that, during this year marking the 20th Anniversary of the birth of the ETF Industry (SPDR S&P 500 ETF Trust: “SPY”), a big development is announced that is sure to further shake up the retail investment world. On February 7, 2013, Charles Schwab announced the availability of a so-called one-stop broker platform for a comprehensive range of ETF choices across all commonly desired ETF asset classes – all available without commission!

Titled “Schwab ETF OneSource”, the platform will enable retail investors and financial advisors to buy or sell selected ETFs from six major providers.  In total, those funds encompass each of Morningstar’s 14 designated asset class categories – thereby making it much simpler for an advisor or investor to efficiently and economically build (and rebalance) a portfolio that reflects their preferred strategic asset allocation mix.

Several investment companies already provide commission-free ETF trading on “selected” ETFs (such as TD Ameritrade, Vanguard, Fidelity, etc.). However, the scale of this platform “raises the stakes” with regard to the battle to capture the largest share possible within the ETF space. For example, among the 105 ETFs available through OneSource, at least one ETF with an annual expense ratio of .10% or less can be purchased commission-free in virtually all U.S. Equity market cap categories.  In addition, there is an emerging markets ETF (expense ratio just .15%), and the PowerShares S&P International Developed Low Volatility ETF (annual expense ratio — a relatively low .25%). That final ETF is within a fund category that is enjoying burgeoning popularity – since it focuses on lower risk equities.

Commenting on this new platform, Jim Ross, the global head of ETFs at State Street SPDR, said: “It’s an industry game-changer!”  Ross also observed that when his organization launched SPY in 1993, it never expected advisors and investors to embrace ETFs to the immense degree that they have during the past few years. http://www.advisorone.com/2013/02/07/schwab-rolls-out-game-changer-a-commission-free-et  It must be noted that, although State Street SPDR ETFs is one of the six ETF providers “stocking” Schwab OneSource, SPY is not among the 105 ETFs available through it!  In fact, if State Street did make SPY available without commission, the Wall Street Journal  would publically excoriate them for making a foolish business decision, since SPY is the biggest ETF and most heavily traded, by institutions, funds, and investors! The other four non-Schwab providers are: Guggenheim Investments, PowerShares, ETF Securities, and United States Commodity Funds.

Industry experts are anticipating extremely significant changes within the investing world as a result of OneSource.  Tom Lydon, president and owner of ETFtrends.com, opines that OneSource will transform the U.S. ETF space (currently totaling over $1.4 trillion) to the same degree that Schwab’s no-transaction-fee mutual fund platform transformed that fund space twenty years ago. It is inevitable that mutual fund growth will slow as ETF growth continues to accelerate.

The editor of ETFguide.com, Ron DeLegge, has offered the logical expectation that OneSource’s incorporation of five other ETF vendors within the platform will drive competing brokers toward the same model.  Building on that prediction, DeLegge stated that the scale of OneSource will compel the countless ETF providers who are not yet on a commission-free platform to start scrambling to be included within OneSource or within one or more of the competitive platforms certain to be created in the weeks ahead.

The “forward-looking” observation that I consider the most fascinating comes from DeLegge, as well.  Referring to the huge (and lucrative) 401(k) market, DeLegge suggests that the sizable cost reduction implicit in the OneSource platform has created the conditions which might well transform the 401(k) business: “The obstacles of high trading costs have been removed!”  What particularly intrigues me about DeLegge’s opinion is that the regulatory authorities have already been addressing a number of thorny issues related to cost (too many “hidden costs”), trustee objectivity, and the challenge of ensuring that the best interest of plan beneficiaries is always the focus of these plans (rather than the interests of the employer and its hired financial providers). If what DeLegge foresees begins to gain momentum, the low cost structure within the ETF space could provide intriguing options for the further evolution of the 401(k) world!

For more specifics about OneSoure, go to:  http://www.schwab.com/public/schwab/investing/investment_help/investment_research/etf_research/etfs.html?&path=/Prospect/Research/etfs/overview/oneSourceETFs.asp

Submitted By Thomas Petty

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