Charles Schwab is doubling down on its make everything free gambit, listing three new core bond ETFs with fees so low they’re basically, well, free…

  • Schwab 1-5 Year Corporate Bond ETF (SCHJ) – 0.06%
  • Schwab 5-10 Year Corporate Bond ETF (SCHI) – 0.06%
  • Schwab Long-Term U.S. Treasury ETF (SCHQ) – 0.06%

The funds are all plain vanilla and biscuit tin and provide different duration profiles for US corporate bond and treasuries. They all track the relevant Bloomberg Barclays bond indexes that their fund names suggest. As expected, they’ll use sampling to track their indexes.

Analysis – Buy SCHW and hedge with SCHQ

After they slashed brokerage to zero, TD Ameritrade, Schwab, E*Trade were all given a curb stomp. Seeing that brokerage reportedly made 10-25% of their revenues, traders sold their share prices down a corresponding 10-25%.

The sell-off took me, at least, a bit by surprise. My thoughts were that, if anything, free brokerage would help discount brokers make even more money.

With free brokerage, there will be more transactions and very probably more clients. More transactions and clients will mean more data; more order flow; more net interest. Schwab's recent introduction of fractional ETFs and stocks is likely to compound this further.

Where the real risk for the discount brokers probably lies is in lower interest rates, which compresses net interest. Here, however, the newly listed SCHQ could help. If interest rates do go to zero (I think they will) SCHQ, with its long duration profile, could provide a useful hedge.

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Image: Walt Bettinger, Schwab CEO