Commission Free ETFs: A Great Option for Cost Conscious Investors
ETF stands for Exchange Traded Funds. Essentially they are mutual funds that trade on the open market like a stock and have their values updated continuously instead of at the end of the day. Recently several major brokerages have started to offer their ETFs without a trading commission, and this is great news for those who are just starting to invest and want to minimize their investing costs.
Recently W.C. Porter wrote about why ETFs suck, and I definitely do not agree with his view of ETFs. In fact, ETFs have several advantages over mutual funds. One is that the expense ratio is generally lower for funds of the same type, and also there is no minimum investment so you could buy as little as one share of the fund. ETFs are also considerably more liquid than mutual funds because you can sell your shares whenever the market is open whereas mutual funds can only be liquidated at the price at the end of the day. Even if you are a buy and hold investor there comes a day you would want to liquidate your shares, and in my opinion it is better to own an ETF than a fund if you want to sell. It is true that with trading commissions it does not make sense to deposit small amounts of money into ETFs, but now the following fund companies are offering ETFs without a commission so that disadvantage is mitigated.
Vanguard currently offers 46 ETFs with low costs. You can now buy Vanguard ETFs without a commission if you open a Vanguard brokerage account. Although the trades will be commission free, if your account has less than $50,000 in it then you will be charged a $20 yearly account fee. Also, if you trade the same fund more than 25 times in a year there may be trading restrictions. Full details are available at Vanguard. Some of the popular funds in the Vanguard ETF family include Total Bond Market (BND) and Total Stock Market (VTI).
Schwab currently only offers eight ETFs, but their costs are also very low. To get these ETFs without a commission you would need to open a Schwab brokerage account.
A couple Schwab ETFs actually have lower costs than the similar Vanguard offerings. A great thing about the new Schwab One accounts is that there are no annual fees even if your account balance is small. On a side note I also have their excellent Invest First Visa Signature Rewards card that gives 2.0% back on all purchases. Since Schwab ETFs are now commission free I am thinking of investing my credit card cash back into these ETFs.
Fidelity is offering 25 ETFs from the iShares family without a commission. iShares ETFs are also very popular and they are administrated by Barclays. To get these ETFs commission free you would need to open a Fidelity trading account.
Most of these ETFs track a popular index, and hold a large number of stocks or bonds. The costs and index tracking differ a little on each ETF so it is up to you to make the best choice. Most of these large ETFs track their underlying indices very well. Currently I do not own the above funds but I am thinking of opening a Vanguard brokerage account to take advantage of their excellent lineup without any commission. I do own some ETFs from the large SPDR fund family which introduced the first ETF SPY in 1993. Since Vanguard, Schwab, and iShares are all offering commission free ETFs it is possible that some SPDRs ETFs may become commission free sometime in the future. The bottom line is that I believe that commission free ETFs are great low cost alternatives to index funds, and as always you should do your own research before investing.