ETF Wars: Schwab Just Went Nuclear

One last thought headed into the weekend…

What if you could invest in the stock market or the bond market for a cost of zero?

I linked to this Index Universe story about Schwab’s new essentially free index ETFs from my WSJ post this morning. But I’ve been thinking about this all day. In dropping its internal expense ratio on the broad market ETF to .04%, Schwab has essentially “gone nuclear” in its war with Vanguard (which is basically running a not-for-profit business at this point). This is Schwab dropping the A-bomb in its quest for market share, a scorched earth maneuver that means an Extinction Level Event for anyone charging money for plain vanilla index exposure.

Whether or not State Street (SPDRs) or BlackRock (iShares) is going to want to play this game too, I have no idea.

But basically, we’ve just reached the Free Equity Exposure barrier quicker than I’d have guessed.  What does this mean for the total $50 trillion wealth management and financial services industry? For the investor? For the institutional allocator or the financial advisor? How many business models are improved by this in our industry and how many are destroyed?

I’m fascinated by these questions and they’ve been on my mind all day.  Apparently I’m not alone.  Two of my friends have written great posts about this today, I want you to read both of them…

Tadas is calling cheap ETFs a Free Lunch for investors.  (Abnormal Returns)

Ari Weinberg’s Mom, ‘Apple Pie and Index Funds’ at Forbes calls it a race to zero that will be deadly for some.  (Forbes)

What do you think about this development? Exciting? Terrifying? What are the consequences?