E-Trade, the online discount broker that burst onto the scene around the time of the Internet bubble, today became the latest company to unveil commission-free ETF trading, with aÂ program that includes 93 ETFs from three different fund sponsors, WisdomTree, Global X and Deutsche Bankâs db-X.
E-Tradeâs foray into the world of free ETF trading is the latest in a string of moves by various online brokers and fund sponsors looking to encourage investorsâ growing interest in exchange traded funds. The most recent addition was by Scottrade, which began offering free trades on its proprietary FocusShares line of ETFs when they came to market in March. Charles Schwab was the first.
E-Tradeâs program bears a strong resemblance to TD Ameritradeâs offering, which features commission-free trading on about 100 ETFs from a number of different sponsors. And like TD Ameritrade, E-Trade will charge investors who buy a fund and then sell it within 30 days a short-term trading fee, a move that is likely to help long-term investors more easily access the ETF market.
Commission-free trading programs are designed in part to make ETFs more palatable to individual investors, who can be dissuaded from investing in ETFs by commission costs.
While ETFs often have lower expense ratios than competing mutual funds, those advantages can be overwhelmed by commission costs unless you are buying a large amount of an ETF. If you purchase $1,000 of an ETF, a commission of just $10 amounts to a full 1 percent of the purchase price. Commission-free programs put ETFs on-par with mutual funds in many ways.
Itâs worth noting that E-Tradeâs initiative wasnât accompanied by any promotional campaign, and one wonders if that if that isnât because free ETF trading is the exact opposite of a profit center for the companies that offer it.
The E-Trade Program
The ETFs featured in the program include some of New York-based WisdomTreeâs most successful funds, such as its line-up of equity products designed with indexes that screen companies for a history of attractive dividend payments. That includes the $1.99 billion WisdomTree Emerging Markets Equity Income Fund (NYSEArca:DEM).
The program also includes the Wisdomtree Asia Local Debt Fund (NYSEArca:ALD), which has attracted almost $400 million since its launch in March, and the WisdomTree Dreyfus Chinese Yuan Fund (NYSEArca:CYB), a nearly $500 million fund that targets Chinaâs currency.
Among the funds from New York-based Global X, which specializes in part on equity ETFs targeting the world of commodities, E-Trade will offer commission-free trading on the Global X Uranium ETF (NYSEARca:URA) and the Global X Global X Silver Miners ETF (NYSEArca:SIL). The two funds have $163.7 million and $310.5 million in assets, respectively.
It is also featuring db-Xâs lineup of target date ETFs, which have different allocations schemes appropriate to an investorâs planned year of retirement.
Schwab Started Trend
As noted, San Francisco-based Schwab started the trend when it rolled out the first of its proprietary ETFs in November 2009, offering free trades to any of its clients that invested in its ETFs. It now has 15 ETFs that together have amassed $4.72 billion in assets, according to data compiled by IndexUniverse.
Fidelity Investments followed shortly thereafter in February 2010, offering commission-free trades on 30 ETFs sponsored by San Francisco-based iShares. Fidelity only has only one ETF currently on the market, though it recently filed with the Securities and Exchange Commission to offer what may well end up being a rather extensive lineup of exchange-traded funds.
The trend was rubber-stamped in the spring of 2010, when Vanguard Group, now the biggest U.S. mutual fund company excluding money-market instruments, began offering its client free trades on its ETFs.
Vanguard is known -- along with Schwab, and now Scottrade's FocusShares â as a firm devoted to low cost investment products, so such a move by such a big player definitely turned heads.
Vanguard now has 64 U.S.-listed exchange-traded funds, including the biggest developing markets fund, the $41.77 billion Vanguard MSCI Emerging Markets ETF (NYSEArca:VWO).
But Vanguardâs move raised questions about who pays for such commission-free trades.
In the end, the owners of other Vanguard funds probably pick up the tab in the form of expense ratios that arenât as low as they might otherwise be. Or, in the case of a publicly traded company like Schwab, shareholders probably pick up the tab.
Exceptions To E-Trade Program
Thatâs why itâs worth looking at what E-Trade isnât giving away.
Thatâs especially true regarding companies like E-Trade and TD Ameritrade, that arenât marketing their own ETFs that would be generating revenues from expense ratios that would offset those lost revenues.
So, in addition to requiring a 30-day holding period to dodge the short-term trading fee, E-Tradeâs program also doesnât cover short sales of ETFs, nor buy to cover and buy-write orders.
Options trades, widely considered to be one of the few remaining domains of juicy commissions in the world of trading, are also off the table in E-Tradeâs new program.
Additionally, for margin customers, the ETFs purchased through the commission-free ETF program arenât margin eligible for 30 days from purchase date.
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