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ETFs

A Great Rate for Trading ETFs: $0

Fidelity and Schwab waive commissions on some exchange-traded funds.

The slugfest between the two heavyweights of discount brokerages, Fidelity and Charles Schwab, is intensifying. That's great news for investors, particularly those who favor exchange-traded funds.

Fidelity recently said that it will waive commissions for online trades of 25 iShares-brand ETFs for at least the next three years. The move follows an announcement by Schwab that it will cease charging its customers commissions for online trading of any of the eight ETFs that Schwab manages. Fidelity also lowered its online commission to $7.95 per stock trade for all customers (that's a price cut of as much as 60%). The action undercuts Schwab, which had already slashed its online stock-trading commission, from $12.95 to $8.95 per trade.

The main drawback of ETFs is that you pay a commission each time you buy or sell. For practitioners of dollar-cost averaging -- investing a fixed amount on a regular basis -- that meant that until now it was cheaper to use regular index funds than ETFs. Commission waivers by Fidelity and Schwab level the playing field to some extent.

The two brokers have taken different approaches to commission-free ETFs, each with its own benefits. Fidelity partnered with BlackRock, which, through its iShares funds, holds half of the $747 billion invested in ETFs in the U.S. The commission-free ETFs, including funds that track Standard & Poor's 500-stock index and the MSCI EAFE index, are among the most popular, meaning that Fidelity customers can now build broadly diversified portfolios at minimal cost.

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Schwab, by contrast, created its own family of eight ETFs. Its edge stems from rock-bottom expenses. Seven of Schwab's eight ETFs charge lower fees than comparable iShares funds and other ETF rivals. If you're interested in ETFs, look no further than Fidelity or Schwab -- you can't do better than zero commission. For now, Fidelity is ahead on points, but it hasn't scored a knockout yet. Expect to see some counterpunches from Schwab in later rounds.

This story originally ran on Kiplinger.com in February 2010. See the complete story.