The appeal of exchange-traded funds is undeniable: low fees, predictability and transparency. Now you can add one more plus: Big online brokers are fighting fiercely for customers by letting them trade certain ETFs without commissions.
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The broker war heated up with Fidelity’s announcement that it would more than double the number of ETFs it offers commission-free. But Fidelity caused a stir when it said it would soon start charging clients a fee if they sold a “free” ETF within 30 days of purchase.
Fidelity’s move prompted us to wonder which of five big online brokers offer the best deals on ETFs. We based our judgment on the number and quality of free ETFs, their expense ratios, and any fees that may apply. Of course, you can trade funds that are not part of a free-ETF program at standard commission rates, which are listed in the table at right. The firms are listed in order of the number of free ETFs offered. (We use the term ETFs to refer to all similar products, including exchange-traded notes and commodity and currency trusts.)
Charles Schwab’s lineup of commission-free ETFs features 105 funds. They include its own Schwab ETFs and funds from six other families, including PowerShares and State Street Global SPDR. In addition to the standard fare—U.S. and foreign stock funds and bond funds—Schwab offers several commodity and currency trusts. The average expense ratio of the free funds is on the higher end of our list, but the range of offerings makes Schwab attractive for ETF investors. Schwab is one of two firms on this list that do not charge for selling a fee-free ETF quickly.
TD Ameritrade offers 101 commission-free ETFs from eight providers, among them iShares and Vanguard. The funds include a handful of commodity trusts and one currency trust, as well as ETFs that track standard indexes. TD scores well for variety, but if you sell a fee-free ETF within 30 days, you’ll have to pay $19.99.
E*Trade marches to its own beat. Its 88 free ETFs focus on specialty and alternative funds from Deutsche Bank, Global X and WisdomTree. That makes E*Trade a fine choice if you’re looking for a cheap way to invest in the shares of, say, gold miners or in stocks of a single country, such as China. Because of the focus on specialty funds, E*Trade’s free ETFs carry the highest average expense ratio on our list. Plus, the broker charges $15.99 or $19.99 for selling a free ETF within 30 days of purchase.
Vanguard offers 67 Vanguard-labeled ETFs without commission. As you would expect from the fund industry’s low-cost leader, Vanguard’s free ETFs carry, on average, the lowest expense ratios among the five brokers. But don’t look to Vanguard for exotic ETFs. All of its free ETFs are either stock or bond funds, making Vanguard suitable for the keep-it-simple crowd. Vanguard does not levy an early-exit fee.
Fidelity recently upped the number of its free ETFs from 31 to 66—one under its own label and the rest from iShares. Traditional stock and bond funds dominate the list, but also included are four ETFs that invest in commodity stocks. Starting August 1, Fidelity will assess a $7.95 penalty for selling a free ETF within 30 days of purchase.