The Pros and Cons of Commission-Free ETF Trades

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If you own exchange-traded funds (ETFs) inside a brokerage account, Wall Street wants you as a customer. Why? Because ETF assets and trading volume account for a growing and significant portion of all stock market activity. Naturally, brokers want to capture that business.

Over the past several months, major brokerage firms like Charles Schwab, Fidelity and Vanguard have made aggressive offers to lure ETF investors into their folds. But should you bite?

The Cost of ETF Trades

ETFs are low-cost mutual funds that trade like stocks. And as with individual stocks, every time you buy or sell an ETF, a brokerage commission will probably apply.

But like many other industries, the cost of online ETF trades has become completely commoditized and cutthroat. A brokerage firm that offers $7 online trades is quickly undercut by another firm that offers the same service for less.

Charles Schwab allows commission-free trading to its brokerage clients for Schwab ETFs. The zero-cost trading doesn’t apply to other ETF families, but with Schwab’s expanding ETF menu, the offer is quite compelling. At the end of July, the San Francisco, Calif.-based investment company had around $1.42 billion in ETF assets.

In May, the Vanguard Group moved to offer commission-free ETF trades for 46 of its Vanguard ETFs. The program allows Vanguard’s brokerage clients to buy and sell Vanguard ETFs without paying any brokerage commissions.

Vanguard’s brokerage clients typically pay $2 or $7 to trade individual stocks and non-Vanguard ETFs. The actual trading commission paid depends on the size of a client’s brokerage account. Investors with accounts $1 million or more are allowed 25 commission free trades per calendar year on stocks and non-Vanguard ETFs.

Along similar lines, Fidelity Investments teamed up with BlackRock to offer commission-free trades on 25 iShares ETFs.

For ETF investors, commission-free trades are a bonanza. This is especially true for people with retirement plans like traditional IRA, ROTH IRA or self-directed 401k plans where money is invested for long time periods. Minimal or nonexistent ETF brokerage costs combined with lower annual expenses compared to mutual funds provide a significant advantage to the ETF investor.

Commission-free ETF trades also open the door for other opportunities.

Strategies like dollar-cost averaging using ETFs now become a viable option. Also, the cost of periodically rebalancing your ETF portfolio is greatly minimized. The argument that dollar-cost averaging only works with mutual funds and not with ETFs is now rendered completely invalid.

Commission-free ETF trading could force other brokerage firms and ETF providers to team up or to risk losing ground to organizations that offer it. On the other hand, if commission-free ETF trades don’t deliver bottom-line results for the companies offering it, don’t be surprised to see it go away.

Drawbacks and Benefits of Free ETF Trades

Great as it may be, commission-free trades do have their drawbacks. The menu of ETFs that qualify for zero-cost trades is usually limited. For instance, if you want to buy a specialized fund that focuses on gold (NYSE: GLD) or a specific country like Brazil (NYSE: EWZ) or uses leverage (NYSE: SDS), the free trade offer probably won’t apply.

The other disadvantage of commission-free trades are behavioral.

Churning in and out of ETFs, or anything for that matter, is usually hazardous to your financial well-being. It’s often more productive to hold onto a good investment than to buy and sell it twenty times on the same day.

But overall, the benefits of commission-free trading probably outweigh the negatives.

This is especially true for active investors with lots of trading activity where the cost savings of commission-free trades could be significant. Do the math. Evaluate the entire spectrum of facts and decide for yourself. Who knows? It may be time to change brokers.

This article is brought to you by ETFguide.com. ETFguide is the information leader on exchange-traded funds because of its vendor-neutral approach and its progressive reporting style. Unique features include an ETF bookstore, a monthly e-mail newsletter, and subscription-based ETF portfolios.

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Article printed from InvestorPlace Media, https://investorplace.com/2010/10/pros-and-cons-of-commission-free-etf-trades/.

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