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What About Those 12b-1 Fees on the Schwab Exchange-Traded Funds?
By JLP | November 10, 2009
Last week, I mentioned that Schwab was introducing several new exchange-traded funds and that what was going to set these apart from the other ETFs was that they were going to trade commission-free to Schwab clients. Lucas, a reader and fairly frequent commenter on this blog read the prospectus and found this interesting tidbit of information pertaining to 12b-1 fees (located on page 5 of the prospectus):
The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets. However, the Board has determined that no such fees will be charged prior to November 14, 2011 (more than 12 months from the commencement of the fund’s operations).
I wanted to clarify this information so I sent my Schwab contact the following email:
On page 5 of the ETF prospectus, the following note is attached to 12b-1 fees:
The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets. However, the Board has determined that no such fees will be charged prior to November 14, 2011 (more than 12 months from the commencement of the fund’s operations).
What does this mean exactly? Does it mean that Schwab is reserving the right to charge 12b-1 fees on the ETFs or is it their intention to do so at some point in the future?
He forwarded my email to the appropriate person and this is the answer I received:
I understand that you had a question about our ETFs and 12b-1 fees. I just want to be clear that Schwab ETFs do not charge 12b-1 fees and there is currently no intention to assess such fees in the future. Maintaining the ability to begin a 12b-1 plan in the future is common industry-wide practice and intended to provide the flexibility that may be needed to address future unexpected significant industry developments.
Jon De St Paer
Vice President, Investment Management Strategy
Charles Schwab
They left the window open just in case…
That’s the information I got. You can take it for what it’s worth. Thanks for the catch, Lucas.
Topics: Investing | 4 Comments »
November 10th, 2009 at 3:39 pm
A typically weaselly answer. There is no reason
to charge 12b-1 fees on ETFs, other than greed
on the part of Schwab….they MAY resrve the right
to do so in the future, but we, the buying
public, MAY reserve the right to buy lower
cost products.
November 10th, 2009 at 10:42 pm
They waive fees like this until they build up a solid asset base. Then they start charging the fees. Many ETFs reduce the expense ratio by a few basis points at launch to be competitive and garner assets. Then the fees start to show up unless the ETF makes a solid profit margin without it.
The 12b-1 fee is something new though. Most ETFs do not have the ability to charge those fees. I think it is because the ETF industry prides itself on being a welcome change from the mutual fund world. The 12b-1 fee is a useless charge from the mutual fund world. Schwab makes a ton of money from their “no transaction fee” mutual funds so I suspect they are secretly hoping the ETF platform doesn’t take off. But, the 12b-1 fee leads me to believe that they are putting this in place in case it does well.
November 11th, 2009 at 5:12 am
When I first opened my Schwab SEP-IRA, the local person advised me that Schwab offered those “one source” funds. He was brutally honest, though, and advised me to pay the one-time transaction cost and purchase Vanguard funds. I then figured out that Vanguard funds (even with a transaction fee) or ETFs (ditto) were better than funds or ETFs charging very high annual fees and scraping off a large chuck to Schwab.
Now, I like Schwab. It’s a wonderful platform for investors.
Just know what you’re buying.
November 11th, 2009 at 5:18 am
PS: Happy Veterans Day to all us veterans. Proud Navy here (active duty 1969 – 1972)(reserves 1972 – 1980). Sweep the thunder from the deep, MSO-430, USS Direct.