Behind the Cheapest ETFs in the World

Published on by on September 22, 2014

Since 2009, Charles Schwab has been releasing a line of ETFs determined to undercut the competition when it comes to expense ratios. With this line of products has come a new standard for the cheapest ETF on the market, charging just 0.04% per year for investment (there are some ETFs that temporarily charge no fees, but we have omitted them from the conversation). Now that these products have had several years on the market, we decided to take a look behind their makeup and how they stack up against the competition.

We singled out Charles Schwab’s three cheapest products: the U.S. Broad Market ETF (SCHB), U.S. Large-Cap ETF (SCHX), and the U.S. Aggregate Bond ETF (SCHZ).

US Large Cap Stocks: SCHX

SCHX is designed to capture the largest (approximately) 750 stocks in the U.S., making it somewhat of a close competitor to the suite of S&P 500 ETFs (SPY, VOO, IVV). Not only is SCHX cheaper than its competition, but it features a portfolio that is slightly more diversified than the competition. Here is a quick side-by-side comparison of SCHX and SPY:

SCHX Metrics SPY
0.04% Expense Ratio 0.09%
16.06% % Assets in top 10 17.55%
766 # of Holdings 503
83.98% 3 Year Return 83.74%
$3,190M Assets $172,500M
261,000 Average Volume 74,058,000

Depending on the time period chosen, the two ETFs trade off between which is the better performer, always within an incredibly close margin. That’s all to say that an investor can gain the same exposure as SPY (and more) with a nearly identical performance for five less basis points (note that VOO does charge 0.05%). It may seem minute, but saving five basis points every year with virtually zero effort can certainly come into play when compounding returns are added to the equation [see also Ten Commandments Of ETF Investing].

Broad U.S. Stock Market: SCHB

SCHB had its sights set on the broad U.S. equity market upon launching, as it too charged just 0.04% for exposure. The fund aims to provide investors with a diversified approach to the entire U.S. market by investing in the largest (approximately) 2,500 securities in the nation. That would make one of its closest competitors the popular iShares Russell 3000 ETF (IWV). Though SCHB launched a full nine years after the aforementioned fund, its expense ratio was much lower and clearly attracted the attention of investors:

SCHB Metrics IWV
0.04% Expense Ratio 0.20%
14.2% % Assets in top 10 14.2%
2024 # of Holdings 2994
84.67% 3 Year Return 83.98%
$3,640M Assets $5,760M
267,000 Average Volume 174,000

The top 10 holdings of these funds are nearly identical, but there is no comparison when it comes to expenses; SCHB charges 16 basis points less for investment, and clearly caught on with investors, as demonstrated by $3.6 billion in assets in just under five years on the market. Also take note that SCHB tends to slightly outperform IWV; this is mainly due to having lower fees, and the performance gap will likely widen over longer periods of time. No doubt about it, Schwab knocked it out of the park with SCHB.

Total Bond Market: SCHZ

 SCHZ took aim at the fixed income world, as it tracked the Barclays U.S. Aggregate Bond Index, like juggernaut ETFs AGG and BND (although its exposure is much closer to the former than the latter). The fixed income field has always seen expenses slightly higher than that of equities simply because investment in debt is a bit more complex. SCHZ debuted in mid-2011, attempting to undercut some of the largest ETFs in the world. Here’s how it has fared:

SCHZ Metrics AGG
0.06% Expense Ratio 0.08%
7.08% % Assets in top 10 14.15%
1837 # of Holdings 2712
6.12% 3 Year Return 6.83%
$830M Assets $18,240M
130,000 Average Volume 1,358,000

While SCHZ has done well for itself for being a three-year old product, it has not grabbed the same attention that its equity counterparts have. The fund has a shallower portfolio than AGG (and MUCH shallower than BND), though it does charge slightly less and fix the top-heavy bias that AGG exhibits. It may simply be that this bond fund has been on the back-burner while equities have been on their bull run and that it needs more time to catch the eye of investors.

The Bottom Line

If nothing else, Schwab’s line of ETFs has proven the concept that investors want to save money, something that Vanguard was well-known for initiating. The price war in the ETF world may be a pain among issuers, but it is certainly beneficial for you as an investor. As major issuers continue to undercut each other, the options at the fingertips of every investor continue to be discounted.

Follow me on Twitter @JaredCummans.

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Disclosure: No positions at time of writing.