Free ETF Trading: Comparing All The Options

As the ETF world continues to grow, the competitive landscape continues to evolve. In recent years, a growing number of firms have attempted to differentiate themselves by offering unique exposure to asset classes and strategies not previously available–such as funds tracking the Philippine stock market or ETNs linked to the price of industrial metals such as zinc or tin. More recently, the ETF industry has witnessed escalating price wars, with multiple issuers lowering management fees in an attempt to lure cost-conscious investors. These price wars have sent expense ratios to as low as six basis points, much to the delight of investors accustomed to forking over upwards of 1.5% annually to active mutual funds. But many ETF issuers have recognized that the total cost of ETF investing goes beyond just expense ratios, and have aggressively marketed programs designed to save investors money when executing ETF trades [see The Total Cost Of ETF Investing]. 

As a way to stand out–or perhaps to keep pace–a number of brokerage houses have signed deals to offer commission-free ETF trading as a way to entice new clients who have embraced the benefits of exchange-traded funds. This developments has added an additional consideration for ETF-savvy financial advisors looking to maximize client returns by minimizing fees, and has the potential to be a major factor for investors choosing between two otherwise (nearly) identical funds. Consider the case of IVV and SPY: both track the S&P 500 and both have expense ratios of 0.09%. Commission-free trading options could be the deciding factor for an increasing number of investors [see Free Report: How To Pick The Right ETF Every Time].

Although commission-free ETF trading is a relatively new concept, several of the biggest players in the space have begun to offer these programs to their clients. Not surprisingly, the scopes of these programs vary, and there are several advantages and limitations for investors each. Below we profile some of the key differences between the free ETF trading systems available to investors today.

Vanguard

Vanguard, famous for its low-cost hands-off approach, offers all of its 62 ETFs commission-free to its clients. The company is probably best known for its ultra-cheap Emerging Markets Fund (VWO) and its Total Stock Market ETF (VTI) which have close to $58 billion and $23 billion under management, respectively. Vanguard also offers clients access to a host of government and corporate bond funds including an Extended Duration Treasury Index Fund (EDV) and even a Mortgage Backed Security (VMBS) option as well. Vanguard’s ETF lineup includes all the tools to build a long-term portfolio, including a number of U.S. and international equity options, as well as various broad-based and targeted bond funds [see Vanguard's complete ETF lineup].

While Vanguard offers an extremely robust product lineup, the offering of commission-free ETFs does have a few holes. Currently, Vanguard’s ETF lineup includes nothing in the way of commodities, international bonds, or munis, and the level of granularity available (e.g., country-specific funds). Nevertheless, Vanguard offers perhaps the most comprehensive free-ETF trading platform– and considering that the average expense ratio is around 16 basis points, paves the ways for investors to minimize all components of the cost equation [also see Vanguard Ups The Ante, Launches Russell ETFs].

It’s also worth noting that Vanguard brokerage clients will be charged either $2 or $7 for trading of non-Vanguard ETFs, rates that stack up favorably to the rest of the industry.

Charles Schwab

Schwab‘s entrance into the ETF industry came long after many of its rivals had established footholds in the space, but the San Francisco-based firm made a splash when it launched its first ETFs late last year. The firm made trading of its ETFs commission-free for Schwab from the get-go, likely prompting other competitors to follow suit. Schwab currently offers clients a diversified mix of its 11 branded ETFs available to its investors free from commissions. The company’s lineup includes  a variety of bond, international equity and domestic equity ETFs, all of which have expense ratios less than 20 basis points and come in at an average of just 0.08%. These low cost options include a short and intermediate Treasury funds, as well as a TIPS product in the bond space. Schwab’s ETF lineup focuses on portfolio building blocks, and as such doesn’t offer much in the way of targeted securities. Investors could easily make a solid–albeit it basic–portfolio with just the 15 commission free products offered from Schwab.

Because Schwab is still building out its ETF lineup, the free offerings are somewhat limited. While the equity offering cover all the bases, missing are ETFs offering exposure to muni bonds, junk bonds, or investment grade corporate bonds.  Investors looking for commodity exposure won’t find it from Schwab. That could all change over the years, as the company has continuing plans to continue beefing up its ETF lineup, but for the time being there are some holes in the product offering blanket [also read Schwab ETFs Could Be A Gamechanger].

Fidelity

The Boston-based financial giant has teamed up with iShares to offer 30 commission free ETFs from the world’s number one ETF issuer, as well as free trading on Fidelity’s Nasdaq Composite Index Fund (ONEQ). The selection from Fidelity consists of the most popular iShares ETFs, including the popular Russell 2000 Fund (IWM), S&P 500 Fund (IVV), S&P Mid Cap 400 (IJH) Fund, just to name a few. Additionally, the program offers seven international equity index funds–ACWI, EFA, SCZ, EEM, EMB, IDV, ACWX–which should allow investors to achieve a high level of international exposure across both emerging and developed markets. In the fixed income arena, Fidelity offers investors commission-free access to five funds including its extremely popular AGG, TIP, and LQD. The company also offers exposure to the municipal bond market through MUB and emerging market bonds denominated in U.S. dollars with EMB [see Fidelity's complete ETF lineup].

Not included in the list of commission-free ETFs are any commodity products, such as the physically-backed gold (IAU) and silver (SLV) ETFs or the futures-based GSG. Also not included are country-specific equity funds, including the ultra-popular Brazil (EWZ) and China (FXI) ETFs. In the fixed income space, the iBoxx $ High Yield Corporate Bond Fund (HYG) is the biggest omission [check out the Cheapskate ETF db Portfolio].

Interactive Brokers

This relatively low key portfolio has a wide range of Global X funds with a heavy focus in commodities and the countries that can impact this highly volatile industry. The selection includes many funds that are often overlooked, such as SIL, but offer great specialized exposure to assets such as silver miners or gold explorers (GLDX). The focus on commodity rich companies on embeds the focus of this portfolio, including countries such as Columbia (GXG), Argentina (ARGT), and Norway (NORW) gives steady growth even within the commodity concentration, make sure to check out the nearly 50 commmission free products offered from Interactive Brokers.

Only five of the funds included are exclusively traded commission free with Interactive Brokers and all of these, FSU,FSA, FSE, FOL, and FSG are leveraged funds. Excluding these funds, every thing else in the portfolio is also available to E*Trade users. There is also a general lose of fixed income, which could be key to evening out the earnings of a commodity based portfolio [see also How To Invest Overseas (Without Currency Risk)].

E*Trade

The newest entrant on this list has is making up for lost time by offering around 90 commission free ETFs from issuers including Global X, WisdomTree, and db-X (Deutsche Bank). The selection of products ranges from international bonds, key asset classes, commodity producers and more. Upon launch, the immediate stand out ETFs were the WisdomTree Emerging Markets Equity Income Fund (DEM), the Emerging Markets Local Debt Fund (ELD), and the ex-Financials Fund (DTN) but investors also started to discover some commodity funds with Global X, including the Silver Miners ETF (SIL), Uranium ETF (URA), and Colombia ETF (GXG) [see E*Trade's complete ETF lineup].

All of your bases are covered with E*Trade, but one main difference is no ETF with E*Trade has a lower expense ratio that 28 basis points, a much higher price to pay compared to the price war ETFs that are also commission free. This could be why the trading levels with these ETFs are much less impressive, with even the most popular fund only trading 3 million times a day. With this great exposure there are some drawbacks, and investors should consider just how many options they need before investing [see also E*Trade Joins the Commission Free ETF Party].

Firstrade

This young and privately owned discount stock brokerage firm from upstate New York was first known for its special offering of Chinese online trading sites and telephone help lines, opening up the american stock exchanges to trading to non English speakers. Much like E*Trade, this business could not exist without internet innovations and the growing number of part time traders interested in new products, but unlike its main competitor there are only 10 funds to choose from. Even in this small portfolio there is a range of equity funds, from the Core S&P 500 ETF (IVV) to the Small-Cap Growth ETF (VBK) including international exposure as well.  Of course the FTSE China 25 Index Fund (FXI) is listed as well, but there is also bond and commodity exposure as well [see Firstrade's complete ETF lineup].

Due to its size, there are a lot of fund types that are not included in this portfolio, including municipal or government bond funds. The focus is on equities, so even though there is a fund for commodities, its the DB Commodity Index Tracking Fund (DBC) which doesnt give anything but an overview of the market. Most of the funds listed only skim the surface of ETF potential, and while they might be good for first time investors, they are not nearly specialized enough for people looking for specific returns [see also ETFs That Should Be Commission Free But Aren't].

TD Ameritrade

TD utilized Morningstar’s research team to select the ETFs included in the program, and as a result the scope of offerings is not restricted to a single ETF issuer and there are over 100 funds to pick from. Unlike the other commission-free programs, TD’s platform includes a host of products from a variety of issuers, including iShares, PowerShares, State Street, Vanguard, WisdomTree, iPath, and Van Eck, just to name a few. The company will offer the usual lineup of products targeting the main components of a portfolio including 30 bond funds and 31 domestic equity ETFs [see a complete list].

In another first, the company will offer free trading on commodity funds, including the popular PowerShares DB Commodity Index Tracking Fund (DBC), and it will be the only one to offer the service on a variety of iShares’ individual country ETFs, ranging from the MSCI Brazil Index Fund (EWZ) to the MSCI Canada Index Fund (EWC). TD’s plan is also the only to offer a commission-free junk bond ETF: State Street’s JNK. Other commission free products not available elsewhere include ETFs focusing on India (INP) and Russia (RSX), as well as a currency carry ETN (ICI) from iPath. It’s interesting to note that TD Ameritrade’s list includes Vanguard’s emerging markets ETF (VWO) but not the iShares product linked to the same underlying index.

TD’s ETF coverage isn’t without a few holes. Of the seven largest U.S.-listed ETFs by total assets, five of them–SPY, GLD, EEM, EFA, and QQQQ–aren’t on the list (those five funds account for about a quarter of all U.S. ETF assets). It should be noted, however, that TD does offer funds linked to the S&P 500 (IVV), MSCI Emerging Markets Index (VWO), and MSCI EAFE Index (VEA).

Scottrade/FocusShares

FocusShares made its return to the ETF industry in March 2011, not as a provider of specialized sector ETFs but as a unit of Scottrade. However, the return was short-lived; the company shuttered the entire lineup less than two years later after failing to generate assets. While they were around, all the FocusShares ETFs were available commission free in Scottrade accounts:

Complete List

More than 200 ETFs are available commission free in one place or another, offering access to just about every asset class available:

One other note: investors still don’t have a way to trade precious metals ETFs commission-free–perhaps an opportunity for other firms looking to follow in the footsteps of those highlighted above.

See complete lists of commission-free ETFs available from:

• Vanguard
• Charles Schwab
• Fidelity
• Interactive Brokers
• E*Trade
• Firstrade
• TD Ameritrade

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Disclosure: Eric is long EWZ, IWM, and VWO.

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