Commission Free ETFs: A Great Option for Cost Conscious Investors

by Xin Lu on 10 June 2010 9 comments
Photo: Nikada

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

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).

Charles Schwab

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.

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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

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.

Tagged: Investment, ETFs
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Carlos Portocarrero's picture

Well done Xin! I applaud you for laying all the information out for Wisebread readers that may have read my earlier post. I have another post laying out some ETF tips so hopefully between your post and my update we can correct some of the negative hype I spread out about ETFs.

Guest's picture
Dangerman

Thank you for correcting that awful article.

Guest's picture
Kristin

I agree that ETFs can be a great investment tool if you can get them without the trading fees, since having to pay a fee to both purchase and sell the ETFs basically turns the low fee investment option into an expensive front- AND back-loaded fund.

Craig Ford's picture

Xin Lu,
Thanks for the post. One thing to add is that the Invest First Visa Signature Rewards card is no longer accepting new applications (in case anyone read this post and was trying to sign up). I got the card and opened a Schwab account about a month or two ago. I've been extremely impressed with Schwab's free ETF offerings. Of course, the fees are hard to beat.

Xin Lu's picture
Xin Lu

Ah, I didn't know that it was closed to new applicants. It's really a good credit card and so far I really like it. I've had a Schwab account for a very long time because my parents opened one for me, and I've used it to buy no load funds, but now my cash back is building up to a couple hundred dollars and I think I'll buy their ETFs.

Guest's picture

ETFs can be a great option for a lot of folks. The fees are lower and they will have less risk than buying individuals stocks. With the market is such bad shape, it make sense to keep your commissions low and maintain a lot of flexibility.

Guest's picture

EFTs are a great option that many people don't even consider. You have actually laid out many good options. Too bad many folks going to to full service brokers don't much about these.

Guest's picture
Guest

Also worth mentioning is Wells Fargo's brokerage arm wellstrade. It gives you 100 free trades per account per year if you have a PMA status with them. PMA status costs $25 per month or $25,000 in total assets with them (including 10% of mortgage balance). At first I was skeptical of the deal but after two years as a customer, I am relatively happy. The big thing for me was that $25,000 does not have to be in a CD/savings etc. The invested amount counts towards the balance requirements. To be clear, I do not represent WF other than as a relatively satisfied customer.

Guest's picture

These are a good option for many folks. They can give you the diversification that you need. EFTs I think are alittle less risky than straight stock purchases.