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Charles Schwab Corp. is jacking down ETF prices again (like a Jack Bogle) after Vanguard, again, raises a series of fund prices -- albeit with a net fee reduction

The Westlake, Texas, super-broker is making clients 'beneficiaries' while the $7-trillion Malvern, Pa., behemoth is raising prices as both firms make strategic calculations about the future.

Monday, June 27, 2022 – 3:26 PM by Brooke Southall
no description available
David Botset: 'We’re committed to ... continue to make our clients the beneficiaries of our strategic focus.'

Brooke's Note: Read everything and nothing into this article. Schwab needs to lower fees to compete. Vanguard needs to raise prices in some cases to compete. Both firms have good rationales for their actions when the details are plumbed. Still, it's an encapsulation of a larger convergence of business models, hence the need to be more like each other. Both firms continue to prosper even if the markets are not, which may mean that their respective CEOs need not be ashamed of a little grass-is-greener envy.

Charles Schwab Corp. is chopping ETF fees not long after Vanguard raised some fund fees -- again -- as the two mega-firms continue to converge on each other's business models -- and pricing.

The Westlake, Texas, broker-dealer reported this month it chopped 10 fund fees, including both passive ETFs and actively managed mutual funds.

Vanguard, on May 27th, reported expense ratio changes for five mutual funds across multiple share classes. Fees are rising on six of eight ticker symbols.

Dan Wiener
Daniel Wiener: 'A basis point... can literally be a rounding error.'

Vanguard is raising the fees to better align with investor interests, according to the firm.

"Such arrangements strengthen the alignment of interests between the advisor and fund shareholders. Increases in advisory fees because of these arrangements are a recognition of outperformance on behalf of fund shareholders," the release states.

Vanguard observer Daniel Wiener counsels not to read much into the Vanguard price hikes. "A basis point here and there can literally be a rounding error," he says. 

Yet investor-owned Vanguard, which manages about $7 trillion, is often rounding up nowadays while asset management competitors like Schwab round down. Schwab Asset Management managed about $623.1 billion on a discretionary basis and $35.5 billion on a non-discretionary basis, as of March 31.

Variable performance

Vanguard has made it clear that it is adjusting its focus to compete up and down market -- and charging accordingly. See: Vanguard may be shorting much vaunted 'owners' of its low-cost index funds as it upshifts to more Wall Street-style exec-comp to thwart competitors and chase high-net-worth investors

The Vanguard fee hikes follow a recent spate of other fee increases reported by RIABiz on March 4. See: Chronic fee chopper Vanguard Group raises prices on nine funds, showing 'ownership' cuts both ways, cutting fat is getting harder and Vanguard pricing is both art and algorithm

Yet, these are not fixed fees so much as variable performance fees in a number of cases, notes Wiener, editor of "The Independent Adviser for Vanguard Investors," a monthly newsletter. 

"Energy was paid a performance fee that raised the expenses by 0.02%," he adds. "In the prior year the performance 'ding' cost them 2 basis points (bps). So, performance swung things by 4 bps."

Because Vanguard's fee lowering affects a disproportionately high number of assets, the fee changes by Vanguard's calculus end up representing an aggregate $2.8 million in net savings for investors.

"Vanguard is owned by the funds managed by the company and is, therefore, owned by its customers," according to an company statement made to the SEC in 2019.

Vanguard made its 2% cut to both classes of Vanguard Health Care Fund Investor Shares. The raises of 4% appear with its Vanguard Energy Fund share classes. Vanguard Dividend Growth Fund, Vanguard Global Capital Cycles Fund Vanguard Global ESG Select Stock Fund Investor Shares all had small increases.

Fee cuts

Meanwhile, Schwab is lowering expenses for investor interests -- and couching its reasoning in Vanguard-like terms, claiming its passing along savings to  "clients, the beneficiaries."

“We continually review our cost-effective product suite to find new opportunities to lower expenses for investors,” said David Botset, managing director, head of equity product management and innovation at Schwab Asset Management.

“We’re committed to delivering products that are affordable, accessible and scalable, and very pleased to be able to continue to make our clients the beneficiaries of our strategic focus.”

ETFs with price cuts include the Schwab U.S. TIPS ETF (SCHP), operating expense ratio dropping to 0.04% from 0.05% and The Schwab Short-Term U.S. Treasury ETF (SCHO), dropping to 0.3% from 0.4%. 

Schwab is also cutting fees on active funds including: Schwab Global Real Estate Fund (SWASX),  Schwab Tax-Free Bond Fund (SWNTX) and Schwab California Tax-Free Bond Fund SWCAX. 

Additionally, in February of this year the net-operating-expense ratio of the Schwab International Opportunities Fund (SWMIX), an actively managed mutual fund, was reduced to 0.83% from 1.25%.

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