Charles Schwab upped the ante Thursday in the battle to capture the passive investing market, slashing fees as more investors are following indexes to maximize their profits.
Schwab cut both its trading commission and fees on index mutual funds. The firm said its latest moves now put it below both Vanguard and Fidelity.
More interestingly, the measures represent a new salvo in what has become an aggressive price war between three of the largest asset manager firms. The move comes just months after Fidelity waived commission on exchange-traded funds offered by BlackRock, which itself had been slashing costs. Fidelity also in December removed short-term fees for 75 of its mutual funds.
"Two of the irrefutable truths when it comes to investing are that costs matter and complexity can negatively affect returns," Schwab President and CEO Walt Bettinger. said in a statement. "Reducing online trade commissions as scale and technology lower our operating costs is a way to ensure our clients benefit from their commitment to us."
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Under the new structure, Schwab clients will pay $6.95 for equity and ETF trades. That fee will put it below Fidelity, Vanguard and other competitors, according to Schwab.
At the same time, expenses for Schwab's index-tracking mutual funds also will decline to align with their corresponding ETFs, which historically carry much cheaper costs. The new structure also will place Schwab funds below its competitors, the firm said.
Spokesmen for Fidelity and Vanguard said investor choices go beyond basic fee structures.
Meanwhile, the investing community was watching the war closely.
"The fee war is endless and won't end anytime soon, but it will continue to drive money into index strategies and this Schwab move is significant," said Todd Rosenbluth, head of mutual fund and ETF research at CFRA.
"Making it that much easier and cheaper to buy index products means more [people] will buy them for asset allocation strategies, and Schwab as a distribution platform with deep pockets will be a driver," he added.
Investors have been pouring money into passive strategies due to their low fees, tax benefits and, in the case of ETFs, ease of trading.
Passive funds took in $504.8 billion in 2016, a total made all the more stunning by the $340.1 billion that came out of active strategies, according to Morningstar.
The primary beneficiary of the flow to passive was the ETF industry, whose assets have swelled to $2.6 trillion and are well on the way to eclipsing $3 trillion by year's end. Most ETFs track indexes, while only about 5 percent of mutual funds follow passive strategies. Mutual funds still dwarf ETFs in total assets, though the gap is closing.
Besides the cost factors, performance has drawn money to passive, as fewer than 1 in 5 large-cap active managers beat basic market benchmarks last year, according to Bank of America Merrill Lynch.
BlackRock, through its iShares funds, is the unquestioned leader in the ETF industry, with just over $1 trillion in assets. Schwab trails in fifth place, though it moved up from seventh at the beginning of 2016 thanks to a 59 percent increase in ETF assets during the year, according to ETF.com.
Whether the Schwab moves will trigger another round of price cuts elsewhere in the asset manager industry is unclear.
However, the war of words likely will continue.
For its part, Vanguard said its clients pay no commissions when buying the firm's products through Vanguard, and it offers commission-free or $2 trades to a large part of its customer base.
Beyond that, a company official said even full-priced trades aren't that different in costs.
"The difference between a $7 Vanguard equity trade and a $6.95 Schwab trade is a nickel, if I do my math right," said John Woerth, Vanguard spokesman. "So after 50 trades, you might save enough for a cup of coffee. And then I would question why a prudent, long-term investor needs to trade 50 times."
Fidelity also downplayed Schwab's move.
"Fidelity is always evaluating our overall value proposition and we encourage investors to look beyond just price when evaluating a firm," spokesman Rob Beauregard said. "We believe Fidelity's overall value is among the best in the industry."
Beauregard said investors should consider a number of factors, including the simplicity of pricing, whether the firm is a trusted brand, and what other services are offered.
— CNBC's Eric Rosenbaum contributed to this report.