Companies Add to Lineups of ‘Free’ ETFs

Updated May 3, 2013, 1:29 p.m. ET


Companies Add to Lineups of ‘Free’ ETFs

Still, trading commissions are only one cost, so other funds may be more attractive on balance



How attractive is “free”? Some of the largest online brokers of exchange-traded funds are determined to find out.

Two have recently expanded the lineups of ETFs they offer without trading commissions, bringing their menus closer to the size of their competitors’.

In February, Charles Schwab Corp.SCHW +6.27% expanded its commission-free ETF menu to 105 funds, up from just its own 15 broad-based index offerings. A few weeks later, Fidelity Investments expanded its exclusive partnership with BlackRock Inc.BLK +3.43% to offer 65 of BlackRock’s iShares ETFs commission-free, up from 30, in addition to Fidelity’s one ETF.

Both programs now challenge TD Ameritrade Holding Corp. AMTD +6.08% and Vanguard Group, whose commission-free ETF choices were already large and diverse. TD Ameritrade offers 101 funds and exchange-traded notes selected by researcher Morningstar Inc., and Vanguard features all 65 of its own ETFs.The expanded offerings represent a push by securities firms and ETF sponsors to get investors and advisers to consider broadening their portfolios to include exposure to more indexes, more sectors and more asset classes in the name of diversification. Looking at the four firms above plus E*Trade Financial Corp., ETFC +4.03% whose menu of 89 commission-free ETFs is heavy on narrowly targeted portfolios, 25% of today’s ETFs—holding more than half of the industry’s assets—are now available commission-free from at least one of the companies, according to research firm XTF Inc.

Mitchell Reiner of Capital Investment Advisors in Atlanta, who manages client portfolios on both the Schwab and Fidelity platforms, is pleased that some of the ETFs used by his firm have “fallen in to free” with the recent moves. Still, a zero commission “is not a decision factor” in choosing ETFs, he says. In looking at multiple ETFs that invest in a particular asset class, he says deciding factors include overall cost, the particular exposure offered and how well each fund tracks its benchmark index.

In some cases, a higher expense ratio or a wide spread between the bid and asked prices for a thinly traded fund—which can force an investor to buy or sell at less-than-favorable terms—can make a commission-free ETF more expensive than one with a small commission.

Investors should bear in mind that ETFs aren’t ideal for everyone and aren’t always cheaper, in total, than traditional index mutual funds. Unlike traditional funds, ETFs trade at market prices that can vary from the value of the underlying holdings.

The enhanced Fidelity menu includes all 10 of the iShares Core ETF series of stock and bond funds. But in commodities, Fidelity offers only four thinly traded ETFs of commodity-producer stocks commission-free, not any funds tied more closely to the prices of physical commodities. None of the Vanguard-sponsored commission-free ETFs offer that kind of more direct commodity exposure either.

While the expanded offering at Schwab offers several true commodity and currency funds, the aggregate average daily trading volume for exchange-traded products across the platform is considerably smaller than the volume for the funds at Vanguard, Fidelity and Ameritrade, according to XTF.

Investors inclined to short-term trading should also note that at Fidelity, E*Trade and Ameritrade, they will incur charges if they sell a commission-free ETF within a specified period. Vanguard doesn’t have a short-term trading fee but says that buying and selling the same commission-free Vanguard ETF on its platform more than 25 times in a 12-month period may result in purchase restrictions on that ETF for 60 days.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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