One of the drawbacks to investing in exchange-traded funds is that you have to pay commissions every time you buy or sell, just as you would to trade a stock. But now, commissions at some brokerages have fallen so far -- that is, to zero -- that ETFs have become even more competitive compared with traditional index funds.
Leading the brokerage pack is Zecco.com, which offers up to 40 free trades a month. Zecco charges no annual fee for regular accounts (but $30 for IRA accounts) and requires $2,500 to start. Others offering free trades are Wells Fargo and Bank of America. B of A provides up to 30 free online trades per month to customers who have a total of $25,000 in various bank accounts. Wells Fargo offers 100 commission-free trades a year if you have at least $25,000 worth of bank and brokerage assets or outstanding loan balances.
Commission-free trading doesn't come without a price. If you hold a lot of idle cash in your account or you want enhanced services, you can find better brokers than Zecco. It pays a measly 1% on cash that isn't invested and provides only a sparse array of market-research tools.
Whether ETFs are a better deal than mutual funds depends on the situation. Say you want to invest $3,000 in an index fund that tracks the entire U.S. stock market. You could buy Vanguard Total Stock Market Index (symbol VTSMX; 800-635-1511). Its expense ratio is 0.19%, so you would pay $5.70 a year to cover operating costs. Or you could invest in Vanguard Total Stock Market ETF (VTI), the exchange-traded version of the same index fund. Its annual fees are just 0.07%, so your total yearly cost would be $2.10. But keep in mind Zecco's $30 yearly fee for IRAs and Vanguard's $10-a-year charge for index-fund accounts that hold less than $10,000 (or less than $5,000 for IRAs).
The calculus changes for fatter accounts. If you invested $60,000 in Total Stock Market Index, for example, you'd pay $114 a year for operating costs. But if you invested in the ETF version through Zecco, you would pay only $42 a year in a regular account and $72 in an IRA. On the other hand, the Investor class of Fidelity's version of the same fund, Spartan Total Market Index, requires only $10,000 to start and charges 0.1% a year for expenses. So, you'd pay $60 a year in operating fees on an investment of $60,000. Both Fidelity and Vanguard drop the fees on their Total Market funds even more if you invest at least $100,000.