Schwab expands commission-free trading platform for ETFs

Seen as a win for investors and participating fund companies

Sep 18, 2014 @ 3:00 pm

By Trevor Hunnicutt

The Charles Schwab Corp. on Thursday unveiled a long-planned expansion of OneSource, its commission-free trading platform for ETFs, adding dozens of funds and managers, including Pimco.

In addition to exchanged-traded funds offered by Pacific Investment Management Co., the top provider of actively managed ETFs, other companies such as ProShares, WisdomTree, Direxion Investments, IndexIQ, Alps and Global X are also adding funds.

Those funds bring to the table a diverse lineup of investment strategies, from ProShares' and IndexIQ's alternatives to WisdomTree's hedged-currency international ETFs and Direxion's volatility-driven S&P 500 index (VSPY).

The platform now includes 182 exchange-traded funds covering 65 Morningstar categories, according to Schwab.

“We are taking a giant step forward for investors,” said Heather Fischer, the Schwab executive who runs the platform. “Clients have been telling us commission-free is important. Cost is important."

Commission-free trading has been a marketing coup among advisers, and Schwab claims more depth in its platform than its competitors.

But the program may be even more popular with its partner fund companies, who can drive assets to their fund lineup and step above the fray of dozens of competitors by being on the platform.

The platform has $31 billion in assets. Funds offered without a commission account for about half of all ETF flows at Schwab.

That's despite the fact that just one of the three biggest fund companies is on the platform. While State Street Global Advisors is available through OneSource, funds from the Vanguard Group Inc. are not.

BlackRock Inc., owner of the iShares lineup, pulled out of the program before it was initially announced publicly, according to two people with knowledge of the planning process. Their funds have been available without commission to Fidelity clients since 2010. BlackRock spokeswoman Melissa Garville declined to comment.

Vanguard and BlackRock account for about 60% of U.S. assets in ETFs.

The existing fund providers on the platform include Schwab's in-house brand of funds, which are among the industry's cheapest by annual management expenses, Guggenheim Investments, PowerShares, ETF Securities and United States Commodity Funds.

Fund companies on OneSource pay an undisclosed amount for the privilege, according to executives from several of those firms. Schwab has consistently declined to comment on those payments.

“What we can say is that there is a fee, a shareholder servicing fee, not a 12(b)1 fee, that defrays the cost of servicing shareholders the way that commissions would,” Ms. Fischer said. “We structured this program to be sustainable. It's not a loss-leader. It's not a marketing gimmick.”

But some advisers have said that commission-free trading could promote unhealthy investing behaviors like overtrading.

Ms. Fischer said it was unclear whether commission-free trading improves investor outcomes.

“It's tough to say; we haven't done an in-depth analysis,” she said. But she added that the program doesn't appear to increase investors' “propensity … to trade for the heck of it.” (The firm hasn't provided data to support that assertion.)

Schwab will continue to add ETFs to the program on a quarterly basis, and it may continue to add fund sponsors, according to Ms. Fischer. But as it does so, the firm may risk alienating existing fund providers on the platform.

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