Since the launch of the first ETF almost 25 years back, the exchange-traded fund industry has attained great heights. There are currently about 2,153 exchange-traded products listed in the United States, with almost $3.54 trillion in assets under management.
Investors can get access to several asset classes through ETFs that are basically a pool of securities, almost like mutual funds. The difference is that unlike mutual funds, ETFs trade throughout the day like a stock. Also, ETFs are considered less expensive and more tax efficient than mutual funds.
However, ETF issuers have been trying to make this less-priced investing medium even cheaper. In a bid to gain market share, they are lately engaged in a fee war of late and have been slashing expense ratios for some of their products aggressively (read: Expenses Matter: Dive into 7 Low Cost ETFs).
So long, the war was primarily within the asset management space, but industry behemoth Vanguard now extended it to the brokerage level. Let’s delve a little deeper.
Vanguard Cuts ETF Commissions
On Jul 3, Vanguard said it will no longer charge commissions for online trades of most of its competitors' ETFs. Vanguard already allows customers perform online trades of 77 of its own ETFs without commissions, but it now intends to broaden that horizon. It will now deploy this practice to about 1,800 ETFs from BlackRock's iShares, Charles Schwab, State Street Global Advisors and other rivals from August.
Per an article published on Associated Press, commission-free ETF trading is not a new concept, but some of Vanguard's competitors are blamed of offering this privilege to products only from certain issuers.
In any case, Vanguard is famous for offering low-cost products. Now, its latest move will likely take the industry-wide price war to a different level. However, Vanguard will not allow commission-free access to leveraged or inverse ETFs due to "their speculative nature” (read: 5 Best Leveraged ETFs of Q2).
Will Other Brokerage Houses Follow the Move?
Normally, such moves are imitated to gain market share like what we have seen in the case of expense ratio cut. But what makes the case different here is that Vanguard’s main business is asset management and brokerage comes second.
So, the company’s revenue stream is less dependent on brokerage thereby giving it the leeway to take chances or try-and-test different marketing strategies. Thus, “by moving to commission-free for all, a brokerage firm forgoes some revenue in exchange for stickier assets," said Rosenbluth, director of ETF and mutual fund research at CFRA.
Other brokerage firms like E-Trade Financial offers commission-free trading on more than 250 ETFs, while TD Ameritrade offers this access to more than 300 ETFs. Charles Schwab has more than 200 commission-free ETFs, including its own ETFs and products from other providers. Fidelity has a total of 95 considering products from both categories. Per Neena Mishra, our director of ETF research, both Charles Schwab and Fidelity are “likely to expand these platforms soon."
Against this backdrop, below we highlight some of the commission-free ETFs (that have a low expense ratio too) available on the market across the providers.
SPDR Portfolio Total Stock Market ETF (SPTM - Free Report) ) – expense ratio 0.03%
Schwab U.S. Broad Market ETF (SCHB - Free Report) – expense ratio 0.03%
Schwab U.S. Large-Cap ETF(SCHX - Free Report) – expense ratio 0.03%
SPDR Portfolio Large-Cap ETF (SPLG - Free Report) –expense ratio 0.03%
iShares Core S&P Total U.S. Stock Market ETF (ITOT - Free Report) –expense ratio 0.03%
iShares Core S&P 500 ETF (IVV - Free Report) – expense ratio 0.04%
iShares Core U.S. Aggregate Bond ETF (AGG - Free Report) – expense ratio 0.05%
iShares Core S&P Mid-Cap ETF (IJH - Free Report) – expense ratio 0.07%
iShares National AMT-Free Muni Bond ETF (MUB - Free Report) – expense ratio 0.07%
Any Downside Risks to This Low-Fee Trend?
First, investors are getting cost-conscious and so they are focusing more on cost part instead of the quality of the product or stock selection. They often ignore that fact that similar ETFs in asset class still offer differences in stock picking and trading costs.
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