Well, Schwab can't do anything about the stock market, but the the financial services company can make it cheaper for people to invest. This morning, the mutual fund operation of Charles Schwab made deep cuts in the expense ratios of its equity index funds and lowered costs throughout its fund family for individual investors.
The news comes only one month after Morningstar forecast that mutual fund expense ratios will rise in 2009.
Under its new pricing, Schwab is giving all investors in a given fund the same expense ratio, whether they're making the minimum initial investment of $100 or investing a larger amount. For example, expenses for a small investment in Schwab's popular Dividend Equity fund will drop from 1.04% to 0.89%, a ratio previously available only to people with a minimum investment of $50,000. Ratios on other funds will have higher drops: For small investments in the Schwab Fundamental U.S. Large Company Index fund, expenses will go from 0.59% to 0.35%.
Playing a game of expense-ratio limbo with other brand-name mutual fund giants--and with ETFs, such as the SPDR S&P 500, that are stealing dollars from index mutual funds--Schwab is claiming the industry's lowest expenses in three categories of index mutual funds: the S&P 500, the total US stock market, and small-cap stocks. For example, Schwab's S&P 500 Index fund, which used to have an expense ratio of 0.36% for small accounts, now has an expense ratio of 0.09%. The expense ratio for the Vanguard 500 Index fund, which has a minimum initial investment of $3,000, is 0.15% for most individuals, while the Fidelity Spartan 500 Index--a $10,000-minimum fund--has an expense ratio of 0.10%.
"This is not a promotional offer or anything like that," said Schwab's Peter Crawford, senior v.p. of investment management services, at a press conference Tuesday morning. "These are permanent reductions."
Granted, Schwab's index fund expenses may not have the absolutely lowest expense ratios out there. If you're lucky enough to have at least $100,000 to invest, your Vanguard 500 Index Admiral Shares will have a ratio of 0.07%. The SPDR S&P 500, by the way, has an expense ratio of 0.0945%, but you'll have to pay brokerage commissions on any transactions.
Keep in mind, also, that some of these numbers won't exactly right all the wrongs the stock market has recently inflicted on your portfolio. On an investment of $10,000, a 0.09% ratio on Schwab's 500 index amounts to expenses of $9 a year, compared to the $15 you'd be paying if you were holding Vanguard's index shares. In other words, you'd be saving yourself $6 a year. That's not quite enough to turn your retirement picture around, but maybe it would make an appreciable difference in your investments given enough time and money in the market.
And who knows? Maybe this will be the first round in a mutual-fund price war. That's a battle all investors would be happy to see.