Charles Schwab has jump-started its exchange traded fund business by offering commission-free trading to clients, and is now attempting to outsmart the competition by trimming down expense ratios. Thus far, the tactic has attracted investors, but the challenge to gain more market share lies ahead.

Schwab (NYSE: SCHW) was the first ETF provider to offer commission-free trades to investors that used its in-house brokerage accounts. In November 2009, the competition began with four equity ETFs launched under the Schwab name, reports Marla Brill for Financial Advisor. By May the provider had $4.4 billion in assets, up from $1.2 billion one year earlier, according to the National Stock Exchange. [Smaller ETF managers Gather More Assets.]

“Advisors often take a wait-and-see attitude before they move in,”says Tamra Bohlig, vice president of product management at Schwab. “But we think the combination of low expense ratios and commission-free trades are going to resonate with a lot of them.” [Investors Seeking Safety in Bond ETFs: Schwab.]

Schwab has set the bar for offering the lowest possible expense ratios available to investors. For instance, the Vanguard Total Stock Market ETF (NYSEArca: VTI), once known as the lowest-cost provider, was undercut by the Schwab US Broad Market ETF (NYSEArca: SCHB) by one basis point. [Lower-Risk Stock ETFs to Consider.]

The commission-free trades are created with the individual investor in mind, making an ETF investment more economical and friendly to a smaller amount of capital. So far, institutional investors and financial advisors already trading upon the brokerage firms platform are making up the majority of ETF assets under management.

Schwab has about $120 billion in ETF assets under management, giving the firm lots of room for expansion. The provider has the right strategy in place to move forward competitively, especially as more financial advisors are shifting assets into ETFs.  About 84% of Schwab investors use ETFs in their portfolios, according to a survey, and about one-third plan to use more of them soon.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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