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February 24, 2010 |
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Free ETF Trading Isn't Everything |
(Dow Jones) Dangling an offer for commission-free trades is a common tactic in the
war to win market share in the exchange-traded fund business.
Vanguard Brokerage Services has increased the number of
commission-free trades it offers some of its wealthiest clients.
Fidelity Investments this month formed an alliance with BlackRock Inc. and said customers may trade 25 iShares ETFs commission-free.
Charles Schwab Corp. in November launched proprietary ETFs with
offers for commission-free online trades for its clients.
This sharp focus on fees omits the fact that the overall
cost of owning ETFs includes other considerations such as commissions,
bid/ask spreads—the difference between the market prices for buying
and selling the ETF—and expense ratios. "There are some fundamental
differences in ETFs that investors need to take into account—including
diversification of portfolio, index approach, tracking precious, and
benchmark construction—before buying a product because it's free," a
Vanguard spokesman says.
Vanguard Brokerage Services in January offered "a small
group" of the clients who qualify for its Flagship Services—which
means they hold $1 million or more in Vanguard mutual funds—100 free
trades on stocks and ETFs a year per household, an increase from its
previous offer of 12 free trades per year.
Competitive responses on trading costs are likely to follow
from others in the ETF industry, according to Paul Justice, an ETF
analyst at investment research firm Morningstar Inc. State Street
Global Advisers, for one, could be next in line to find a way to make
its funds available without a commission charge, he says. State Street
had no one available to comment.
Justice questions whether Vanguard, which offers ETFs with
management fees that are typically among the lowest in the industry,
needed to make a commission-free offer in the first place. Even on
Fidelity's trading platform, he says, "there are cases where I would
choose the Vanguard fund over the iShares fund…even though I'd be
paying the trading cost."
A commission is only a small one-time part of the overall
cost of an ETF, Justice says, and a management fee will typically be a
bigger drag on a portfolio over time. "You're talking about $8 versus a
percentage of your investment," he says. "That's without getting into
tax efficiency and things that can really impact your performance over
time."
Daniel Wiener, editor of the newsletter Independent Advisor
for Vanguard Investors, said Vanguard made the move to make its
brokerage services more competitive with discount brokerages. But he
labeled Vanguard's move a "tepid" half-step because it is only making
the offer to some of its wealthiest clients.
Simply considering expenses is too simplistic, Wiener said.
For an investor who is trading more, a lower spread between bid and ask
prices may be worth more than 10 or 20 basis points on an operating
expense ratio, he said.
Gus Sauter, managing director and chief investment officer
at Vanguard, said that for investors who are trading daily, perhaps
commission rates are very important. "If you're investing for the long
term, then the annual cost becomes much more dominant over the
acquisition cost," he says.
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