Schwab Debuts Cheapest Ever Bond ETF (SCHZ)

by on July 15, 2011 | Updated July 16, 2011 | ETFs Mentioned:

Schwab was a latecomer to the ETF industry, launching its first products years after companies such as iShares and Vanguard had established themselves as pioneers in the space. But Chuck has been aggressive in playing catch-up, introducing commission-free ETF trading (a move many others have since replicated) and rock bottom expense ratios to attract cost conscious investors. Today the company rolled out the Schwab U.S. Aggregate Bond ETF (SCHZ), a new offering in the Total Bond Market ETFdb Category that will compete directly with existing funds from iShares, Vanguard, and State Street.

The new ETF will seek to replicate the Barclays Capital U.S. Aggregate Bond Index, a broad-based benchmark that measures the performance of investment grade U.S. debt. The index underlying SCHZ includes Treasuries, mortgage-backed securities, investment grade corporate debt, and securities issued by agencies of the U.S. government. SCHZ is the fourth ETF seeking to replicate that bond index, joining products from the three largest ETF issuers. The new ETF will also be the cheapest of the group with an expense ratio of just 0.10%. That makes SCHZ the cheapest bond ETF available to U.S. investors, undercutting BND by a single basis point.

BarCap Agg ETFs
Ticker Issuer Expenses AUM* Inception
SCHZ Schwab 0.10% n/a 7-14-2011
BND Vanguard 0.11% $10.2 billion 4-3-2007
LAG State Street 0.17% $259 million 5-23-2007
AGG iShares 0.22% $11.9 billion 9-22-2003
*As of 6/30/2011

Like all Schwab ETFs, SCHZ will be eligible for commission free trading within Schwab accounts. BND can be traded commission free in Vanguard accounts, while AGG is eligible for free trading on the Fidelity platform. Both AGG and BND are also included in TD Ameritrade’s list of more than 100 commission free ETFs [see How To Find Commission Free ETFs].

Low Cost ETFs Gaining Ground

There is growing evidence to suggest that investors have a preference for low cost ETF options when given the choice. In the first half of 2011, the Vanguard MSCI Emerging Markets ETF (VWO), which charges just 0.22%, took in about $5.3 billion. During that same period the iShares MSCI Emerging Markets Index Fund (EEM), which is linked to the same index as VWO but charges 0.69%, saw outflows of $8.5 billion. It’s a similar story in the physical gold ETF space; GLD saw more than $3 billion go out the door in the first half of this year, while IAU took in almost $1.3 billion. GLD and IAU both invest in gold bullion, but the iShares fund charges just 0.25% (GLD charges 0.40%).

[For more on the new Schwab ETF, see the SCHZ fact sheet. For updates on all new ETFs, sign up for the free ETFdb newsletter]

Disclosure: No positions at time of writing.