A New Low -- in ETF Fees

Here’s an idea to reduce the cost of health care: Bundle the whole system and put it in an ETF. Because even as the Supreme Court hears Justice Department lawyers argue about excessive mutual fund fees, the nefarious financial arsonists supposedly guilty for burning down the financial system have succeeded in cutting costs for consumers to levels that couldn’t have been imagined even a few years back.

Earlier this week brokerage and mutual fund mainstay Charles Schwab fired a major salvo, launching a line of ETFs that set a new benchmark for value-conscious investors. Schwab U.S. Broad Market ETF (SCHB) and Schwab U.S. Large-Cap ETF (SCHX) both offer the usual spate of large-cap heavy domestic names like Exxon Mobil (XOM), Apple (AAPL), Procter & Gamble (PG) and Microsoft (MSFT). What’s unique is their price – both funds offer annual expense ratios of 0.08%, among the lowest fees in mutual fund history. On a $10,000 investment, you’ll pay $8 a year for a widely diversified portfolio. That’s cheaper than a six-pack of imported beer.

Moreover, Schwab is offering a unique opportunity to trade them commission-free via a Schwab brokerage account, a unique value even Fidelity doesn’t offer that with its sole ETF offering, Fidelity Nasdaq Composite Index (ONEQ) which tellingly has garnered only $120 million since its introduction more than five years back. For active investors, the ability to trade the broad market commission-free is unheard of, especially from a company that was previously slow to match other discount brokers' rates.

Schwab International Equity ETF (SCHF), also launched this week, boasts an annual expense ratio of 0.15%. That’s 89% lower than the average international large-cap core mutual fund and a major savings especially if held over a long period of time.

ETF assets have soared 33% in 2009 and it’s no surprise why. Not only to the products offer a wide spectrum of assets from which to choose, from food stocks to the Swiss franc, but healthy competition has driven costs lower even as choice and liquidity have soared. While Schwab’s new funds offer nothing new in terms of exposure or asset class, they’ve thrown down the gauntlet in terms of cut-rate fees for first-rate products. All investors benefit from that effort.

On Wednesday, the House Financial Services Committee passed a bill giving states the power to further regulate all hedge funds, even those that manage less than $100 million in assets. Could such tiny operations pose any threat to global financial stability? No. Have such funds engaged in widespread fraud or deception of customers? Hardly – the average hedge fund outpaced supposedly conservative index funds in 2008 by over 20%. Will regulation help prevent chicanery? Not likely – we’ve previously mentioned that Bernie Madoff himself was registered with the SEC.

However, as a result of the additional regulatory burden, you can expect fees to remain higher than they otherwise would for many of the industry’s best-performing products. In Washington, that’s known as “protecting the investor.” Ironic, huh?