Commission-free ETFs have become a popular marketing tool used by online discount brokers. Fees take a toll on an investment portfolio and brokerage firms want a way to market to new clients, so the offering makes sense on many levels. Commission-free ETFs can allow investors to reduce fees and take a more broad-based approach to their investing.
There is just one issue – not every discount broker offers commission-free ETFs. In fact, some of the best discount brokers have never offered them and may never offer commission-free ETF trading. While that shouldn’t knock them out of consideration for your investing needs, it’s just one more factor to consider before you decide on an online broker and open an account.
Which Online Brokers Sell Commission Free ETFs?
As mentioned in the beginning, not every discount broker offers commission-free ETFs. In some instances, the brokerage has a relationship that allows them to offer funds from certain families and nothing else. That is not the case with every online broker. Below is where the some of the best discount stock brokers stand:
E*TRADE: Etrade offers 115+ commission-free ETFs. They’re not proprietary funds but offered from three separate fund families. It is important to point out that, to take advantage of the zero commission, you must hold the fund for 30 days; otherwise be charged $19.99 for the sale. You can read our Etrade review for a further breakdown of other offerings at Etrade.
TD Ameritrade: TD Ameritrade offers 101 commission-free ETFs. They’re also not proprietary funds but offered from seven separate fund families. It is important to point out that you must enroll in their free ETF program to take advantage of the zero commission as well as hold the fund for 30 days or get charged $19.99 for the sale.
Scottrade: Scottrade does not currently offer commission-free ETFs. Scottrade did offer them in the past, but no longer does. However, Scottrade does offer over 3,100 no transaction fee mutual funds, which is more than any other discount broker. You can read our Scottrade review for more research on the company’s trading platform and services.
TradeKing: TradeKing does not currently offer commission-free ETFs. There is one small reason for that – they are the market leader for low commissions at $4.95 per trade. That same price applies to ETF trading and is thus far the best value in the industry. Learn more from our TradeKing review and why TradeKing may be the best online stock trading site for you.
TradeStation: TradeStation does not offer commission-free ETFs and likely never will. That’s for one simple reason – they target very active traders. TradeStation’s commission structure greatly benefits those investors who trade actively and is not for more long-term, “buy and hold” investors. If you’re a high-volume day trader, check out our TradeStation review for more details on the firm’s pros and cons.
OptionsHouse: OptionsHouse does not currently offer commission-free ETF trading. Like TradeKing above, the reason is due to their $4.95 commission. OptionsHouse is also light on mutual fund offerings with only 1,000 no-load funds. The commission comes in at a competitive $20, but you will want to look elsewhere for a more robust fund offering. Check out our OptionsHouse review for more on the firm’s offerings.
Vanguard: Vanguard currently offers over 60 commission-free ETFs. Vanguard limits those to funds specifically in their family. It is important to point out that Vanguard is the leader when it comes to expenses, so don’t allow the limitation scare you off if they’re the broker that best meets your needs.
Schwab: Schwab has the most robust commission-free ETF program, offering over 200 funds from 14 fund families. If you are an OptionsXpress client, you get access to the same funds. Unlike Etrade and TD Ameritrade above, Schwab does not charge an early redemption fee.
Fidelity: Fidelity offers 70 commission-free ETFs through their partnership with iShares. Fidelity does charge an early redemption fee of $7.95 if you sell out of a fund within a 30-day window.
Are Robo-Advisors An Alternative To Commission Free ETFs?
Think of a robo-advisor as a virtual financial advisor. They manage your investments for you, though at a significantly reduced rate to their live counterparts. This begs the question if a robo-advisor can be a justifiable alternative to investing in commission-free ETFs on your own. In some cases, robo-advisors are a good alternative.
The two largest robo-advisors, Betterment and Wealthfront, allow access to 10-15 ETFs. Some of those ETFs are going to be low commission funds, such as VTI or Vanguard Total Stock Market ETF, which has a crazy low expense ratio of .05%.
The thing to consider is if you want to pay the fee to Betterment or Wealthfront on top of the expense ratios charged by the ETF. The fees, albeit very low, do need to be considered. If you want someone to manage your investments, it can be worth the expense.
The other major robo-advisor, Motif Investing, offers a program that offers a motif of low-cost ETFs known as their Horizon funds. Like the other two robo-advisors above, you would need to consider if the additional commission cost of $9.95 is worth it to you.
One solution worth mentioning is simple – two separate investment accounts, each used to leverage the benefits of a specific broker. A robo-advisor can be a great way to automate your investment needs and diversify with a handful of low-cost index funds. Your second account would be with a traditional brokerage, where you can take advantage of low-commission stock trades and free ETFs.
What To Watch For With A Commission-Free ETF
Commission-free ETFs sound like a great deal. You buy a fund and do not pay a commission. However, you must always look beyond the surface to evaluate some of the risks.
Here are some of the risks consumers face when investing in commission-free ETFs:
- High Fees. What many investors forget or miss is the expense ratio a certain commission-free ETF charges. For example, sometimes paying a commission of $4.95 to trade an ETF with a 0.25% expense ratio is better than buying an ETF with a 1% expense ratio. Ultimately, your investment portfolio will feel the result if you hold the fund long-term. The SEC explains that even a 0.75% difference in expense ratios means a net difference of $30,000 out of a $100,000 portfolio over the course of 20 years. You’d be better served, all things being equal, buying the lower fee ETF with the commission.
- Less Liquidity. Investors also tend to overlook how actively an ETF trades. Across the board, some of the ETFs offered by online brokerages trade very little. How is that a risk to you? If you want to trade out of the ETF, you will likely face challenges unloading it, not to mention that the spread will be wider and likely result in you not receiving a fair price.
- Bad ETFs. This isn’t to say ETFs are bad. It means that some of the ETFs offered in commission free programs aren’t very good or are highly specialized funds focusing on erratic sectors. If you’re new to investing or are more risk-averse, this could open you up to greater risk. You can avoid this through proper research, but if due diligence is not done, it can expose you to more downside.
The Bottom Line
Commission-free ETFs can make a great addition to your portfolio. If you rollover your 401(k) to a discount broker, free ETFs can play a positive role in your retirement planning. Nevertheless, like any financial decision, don’t go into choosing commission-free ETFs blindly.
When choosing the best online broker for your needs, don’t limit yourself to the firms who offer commission-free ETFs, but look at what they offer holistically. If you do choose one because they offer commission-free ETFs, make sure the brokerage meets your full investing needs.