How Schwab Gains from Offering Free ETF Trading

by Trefis Team
-6.83%
Downside
28.41
Market
26.47
Trefis
SCHW
Charles Schwab
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Charles Schwab Corporation (NYSE:SCHW) revealed that it would offer new 401(k) retirement plans to its customers consisting entirely of exchange-traded mutual funds (ETFs) for free. [1] We look at at how this idea could actually add value to Schwab as it competes with other online brokerage, banking and financial services firms like E-Trade (NASDAQ:ETFC), Ameritrade (NYSE:AMTD), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC).

Schwab engages in securities brokerage, banking, and related financial services through its subsidiaries that manage a combined $1.7 trillion in client assets. The company has 8.1 million active brokerage accounts, 1.4 million corporate retirement plan participants, and 728,000 banking accounts.

Our price estimate for Charles Schwab is $19.60, implying a nearly 20% premium to the market price.

ETF’s New to 401(k)s

ETFs have been a popular instrument among investors because they can be traded on exchanges like stocks, offer diversified exposure for lower fees. As a result, ETFs have grown in recent years to become almost a trillion-dollar market. [1]

The 401(k) market is around $2.8 trillion market currently and are popular among employers who want to sponsor their employees’ retirement plans. However so far, ETFs are not a significant part of these accounts as most of them rely on actively managed or index mutual funds.

Schwab’s Clearly Gains from this Move

Schwab’s move demonstrates an attempt to draw focus on ETFs to help increase its customer base. While Schwab benefits from additional customers who open trading accounts, the real aim here is to grow assets on which it can earn interest.

Our analysis of the company shows that income from its mutual fund offerings and other investments contribute around 35% of the company’s value and improving the prospects for this business would only mean more upside. You can see how much the company’s $19.64 price estimate is affected by the size of its mutual fund assets by making changes to the chart above.

See our complete analysis for Charles Schwab

Notes:
  1. Schwab’s Bold Bet on ETFs, The Wall Street Journal, June 1 2011 [] []
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