Should You Invest in ETFs That Don't Charge Commissions?

Should You Invest in ETFs That Don't Charge Commissions?

You may have come across some information on the increasing popularity of commission-free exchange-traded funds (ETFs) if you are an exchange-traded fund (ETF) investor or if you are considering getting started investing in ETFs.

On the surface, it may seem like a smart idea to make any investment that does not involve paying commissions. However, “free” does not always equate to “cost-free.” When it comes to investing, it is generally a good idea to keep costs to a minimum. This is especially true when you buy and hold investments like mutual funds and exchange-traded funds (ETFs).

Investing in any kind of fund, however, comes with a variety of other costs in addition to the charges. These costs are referred to as fund expenditures. Therefore, before investing in commission-free ETFs, you should ensure that you fully comprehend how these investments operate, in addition to the other fund fees and charges that are involved.

Key Takeaways

It might seem like a smart idea to invest in commission-free exchange-traded funds (ETFs), but free doesn’t always imply there are no charges involved.

In most cases, a brokerage firm or fund provider will have its own proprietary funds, which it will then make available to customers free of charge.

On the other hand, the company will often levy some sort of commission or fee on sales of exchange-traded funds (ETFs) that are not members of the firm’s own family of funds.

When the brokerage firm or fund company where you hold your account charges commissions or trading costs, investing in commission-free exchange-traded funds (ETFs) makes no sense.

How Commission-Free Exchange Traded Funds Operate

Exchange-traded funds (ETFs) are referred to as commission-free ETFs when they do not have any transaction expenses associated with them. The purchase of exchange-traded funds, which are comparable to mutual funds but trade on an exchange similar to that of stocks, results in the payment of commissions to the exchange. 

Most brokerage houses charge commissions on exchange-traded funds (ETFs), which are also called “transaction fees.” These fees are usually between $10 and $20.

When you buy or sell shares, you will be subject to the ETF commission fee for each and every transaction. If you buy shares of ETFs on a regular basis, the cost of these costs might add up to a significant sum over time. If you purchase or sell shares of an exchange-traded fund (ETF) at least once a month, you may potentially save hundreds of dollars annually in trading costs by purchasing ETFs from a provider that does not charge a commission.

Organizations That Provide Commission-Free Exchange Traded Funds

Commission-free exchange-traded funds (ETFs) are made available by the vast majority of brokerage firms and fund companies. The brokerage firm or fund provider will typically have its own proprietary funds, which it may refer to as “no transaction fee” or “NTF” funds because it does not charge investors any commissions when buying or selling shares of those funds. 

On the other hand, the company will often levy some sort of commission or fee on sales of exchange-traded funds (ETFs) that are not members of the firm’s own family of funds.

For instance, Vanguard does not levy commission fees on exchange-traded funds (ETFs) that it issues, but the company does levy transaction fees on ETFs issued by competitors such as Fidelity. If you want to buy an exchange-traded fund (ETF), you should check with the brokerage firm or fund company that manages your individual retirement account (IRA) to see if they offer the type of ETF you want to buy.

Top Financial Institutions That Provide Commission-free Exchange Traded Funds

  • The commission is paid to brokers or fund companies. Commission-Free Funds
  • Etrade 80 exchange-traded funds (ETFs) from DBX, Global X, and Wisdom Tree for $9.99 each.
  • Fidelity charges $7.95 for every iShares ETF.
  • Firstrade charges $6.95 for ten exchange-traded funds (ETFs) sourced from Vanguard, iShares, and PowerShares.
  • $8.95 Schwab 15 Schwab ETFs
  • TD Ameritrade is $9.99. One hundred and more exchange-traded funds (ETFs) from iShares, SPDR, and Vanguard.
  • $7.00 Vanguard 64 Vanguard ETFs
  • Forbes statistics

You can see that the majority of brokerage firms and fund businesses offer their very own exchange-traded funds (ETFs) without charging a commission fee. On the other hand, they often levy fees for the purchase of shares of ETFs offered by other firms. Investors should carefully think about which exchange-traded funds (ETFs) will help them reach their goals and then choose the best broker or fund provider based on those goals.

When trading exchange-traded funds (ETFs), investors may need to choose which brokerage business or fund company they will work with, based on the frequency of their trades and the funds that they invest in. For example, if an investor’s needs for exchange-traded funds (ETFs) can be met by a single provider, like Vanguard, that investor can open an account with Vanguard and buy and sell ETFs directly through that account.

When to Purchase Commission-Free Exchange Traded Funds

There is no guarantee that investing in commission-free ETFs will be profitable. For instance, if you have an individual retirement account (IRA) with Schwab and you make frequent trades in Vanguard exchange-traded funds (ETFs), the fees on your trades will be too high to justify buying, holding, and selling Vanguard funds.

But if you are a die-hard Vanguard investor and can reach all of your financial goals by putting all of your money into Vanguard’s mutual funds and exchange-traded funds, there is no reason for you to buy ETFs from any other brokerage firms or fund providers.

It is essential to be aware that exchange-traded funds (ETFs) are extremely similar to commodities. This implies that all of the funds that have the same goal or that use the same benchmark will have holdings that are comparable to or identical to one another. Because of this, people often think that the exchange-traded funds (ETFs) with the lowest total fees are the best.

If you have a brokerage account with Vanguard and you want to purchase an S&P 500 Index ETF, you should get the Vanguard S&P 500 ETF because it does not charge a commission (VOO). Because all funds that track the S&P 500 will have the same holdings, the long-term investor should choose the exchange-traded fund (ETF) with the lowest expenses.

When it Is Not a Good Idea for Investors to Purchase Commission-Free ETFs

When the brokerage firm or fund company where you hold your account charges commissions or trading costs, investing in commission-free exchange-traded funds (ETFs) makes no sense. 

The one and only exception to this rule are when an investor keeps an account at a certain brokerage firm or fund company that has fees charged for trading ETFs but the investor does not place frequent trades at that particular brokerage firm or fund company.

Investors should steer clear of buying exchange-traded funds (ETFs) from brokerage firms or fund companies where the value of buying and keeping the ETF would be less than the cost of trading it. 

For instance, if an investor has the opportunity of buying and holding an exchange-traded fund (ETF) at a particular brokerage company and the expense ratio of the ETF is the lowest for all funds in its respective category, but the fund company charges $10 per trade, it will not make sense for the investor to buy the ETF if the investor wants to make monthly investments in the fund.

Consider the following scenario for a more specific illustration: An investor has an individual retirement account (IRA) with Schwab but wants to buy shares in a specific category of an exchange-traded fund (ETF) that is only offered by Vanguard or iShares. The investor will be required to pay a trading fee of $8.95 each month in order to purchase $100 worth of the ETF on a monthly basis. The cost of purchasing the fund comes to over nine points and zero percent.

Concluding Remarks Regarding Commission-Free ETFs

Considering that the majority of exchange-traded funds (ETFs) are passively managed index funds that follow the same respective indexes, it does not make sense to purchase shares that have a commission attached to them. For example, every mutual fund and exchange-traded fund (ETF) that replicates the S& P 500 Index invests in the same stocks. Why invest in a fund that levies fees when you may choose an alternative that does not require a commission?

When you purchase a commission-free exchange-traded fund (ETF), you are able to keep more of your money in your investment rather than having it go toward paying your broker’s fees. Be aware, on the other hand, of other charges such as management fees. 

It’s possible that a brokerage will try to get you to invest in their commission-free exchange-traded fund (ETF), but they might forget to mention that their ETF has a higher expense ratio and, as a result, costs more than an identical ETF offered by another company that charges a commission.

Additionally, it is essential to be aware of the various significant distinctions that exist with ETFs. For instance, exchange-traded funds (ETFs) that are recently introduced or have a low volume of trading often have lower levels of liquidity. 

The trading costs associated with a smaller ETF that is not widely traded may be higher than those associated with a larger ETF that is traded frequently. When you seek to buy shares of a thinly traded exchange-traded fund (ETF), you will pay these higher trading fees in the form of a wider bid-ask spread.

To summarize, it is important for investors to search for exchange-traded funds (ETFs) that have low expenses and no trading fees (no commissions) whenever it is possible to do so.

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