There’s no secret to the simple but effective strategy employed by Charles Schwab (NASDAQ:SCHW) to expand its scale and attempt to dominate the low-cost trading sector it serves.
To that end, earlier in the month they launched several ETFs with extremely low fees and free trades for those ETFs through its online trading platform.
Schwabs first set of ETFs they launched are Schwab U.S. Large-Cap ETF (SCHX), Schwab U.S. Small-Cap ETF (SCHA), Schwab U.S. Broad Market ETF (SCHB ) and Schwab International Equity ETF (SCHF).
Although there are exceptions, an ETF is primarily a commodity product, which means those with the best prices will win, and that bodes well for the discount broker. Where Schwab will especially shine is in the tracking passive investments like indexes, where nothing is required other than the tracking.
The question becomes that once the smoke clears will Schwab be able to monetize their ETFs while offering rock bottom pricing? The answer seems to be yes.
Obviously they’ll make money by those that like to bounce in and out of the market, garnering a fee on every trade. For those that like to invest the opposite by buying and holding, management fees can be applied. Finally, financial advisers have been flocking to the discount broker to use its trading platform. This should be by far the best opportunity to turn profits from their ETF strategy over the long term.
Concerning why I said this is capitalism at its best, is Charles Schwab, by this move, will force other brokerages to cut down on trading costs and fees in order to compete. As I mentioned, ETFs are primarily a commodity product, and so competition is based on price alone.
The beauty of the capitalist way of doing things is companies like Charles Schwab work hard at taking all the fat out of the business and competing on volume, making small amounts on each individual transaction. What this does is force competitors to do the same, making it less expensive for investors to do business across the entire industry.
Of course if their competitors aren’t able to match their operational expertise, then they’ll fall by the wayside and the better operating companies will pick up their business. This is why capitalism is by far the most productive way to generate wealth for a society, while creating affordable products and services. This, again, is why banks within the financial system should never have been bailed out, as capitalism wasn’t allowed to do what it does best: eliminate the poorly managed companies in order for the quality companies to survive and thrive.
For Charles Schwab, they show how it can be done and done profitably, while pressuring its competitors in healthy competition to have to do the same. That’s the power of capitalism and why it outperforms everything else out there.
This is why Charles Schwab has built a solid business which caters to client assets worth close to $1.3 trillion.
