Will Schwab's [profile] plan to develop a commission-free ETF supermarket, offering funds from a variety of firms, work? Jason Kephart of InvestmentNews writes that there may be a catch.

For example, Kephart notes that the three biggest providers of exchange-traded funds, BlackRock Inc.'s [profile] iShares, the Vanguard Group Inc. [profile] and State Street Global Advisors [profile] have yet to sign on. And these three hold 83.5 percent of the $1.3 trillion in assets in ETFs as of the end of November, according to Morningstar.

What's the catch?
Kephart writes this on the subject:

The sticking point reportedly is a 5- to 10-basis-point distribution and marketing fee Schwab has proposed the ETF providers pay to be on the platform. It would be similar to the 12(b)-1 fee some mutual funds charge.

The fee may seem small, especially compared with the 25 basis points mutual funds routinely charge in 12(b)-1 fees. But for the lowest-cost ETFs the levy could almost double or triple expenses. The $23 billion Vanguard Total Stock Market ETF (VTI) charges 6 basis points. The $33 billion iShares S&P 500 ETF (IVV) charges 7.

Further complicating matters is that Schwab charges only $8.95 per trade. So for some accounts, costs actually could go up, thanks to the free program.

Kephart writes that the new platform "would make Schwab the first brokerage to offer advisers commission-free trading on an unlimited number of ETFs from multiple providers."

He also looks at the successes of two other platforms, run by TD Ameritrade Holding Corp. and E*Trade Financial Corp., in their efforts to break into commission-free trading.

Will the strategy work? Kephart's answer can be found in InvestmentNews. 

Edited by: Tommy Fernandez


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