Save Hundreds, Even Thousands, of Dollars in Commissions

A commission fight broke out between online brokers earlier this year.

On Feb. 2, Charles Schwab (SCHW) cut commissions on stocks and ETFs from $8.95 to $6.95.

A few weeks later, on Feb. 28, Fidelity slashed commissions on stocks and ETFs from $7.95 to $4.95.

Not to be outdone, Schwab matched Fidelity’s $4.95 just 12 hours later.

Two days after that, TD Ameritrade (AMTD) and E*Trade (ETFC) had joined the scrap. Each firm reduced trade commissions from $9.99 to $6.95.

In the end, the “Big Four” online brokers had lowered commissions in the range of 30% to 45%.

Investors cheered the commission compression. Especially the “active traders,” who were now on pace to save hundreds (or even thousands) of dollars on an annual basis.

But many investors are unaware that the “Big Four” also offer commission-free ETF platforms. And there are hundreds of ETFs to choose from.

For example …

Schwab offers 243 commission-free ETFs. Sixteen ETF providers (Guggenheim, PowerShares, State Street WisdomTree, etc.) participate on the Schwab ETF OneSource platform. Schwab’s ETFs are the lowest-cost index funds in the industry. For instance, the Schwab U.S. Broad Market ETF (SCHB) has an expense ratio of 0.03%. (Meaning, if you invest $10,000 in SCHB, you pay just $3 in annual expenses.) See the full list here.

Fidelity offers 91commission-free ETFs. Twenty-one Fidelity ETFs cover bonds, factors, sectors and the Nasdaq Composite Index. The remaining 70 ETFs are all iShares from BlackRock. See the full list here. Note: You’ll have to click through the five categories to see all ETF offerings. Otherwise, if you click on “see all commission-free ETFs,” Fidelity wants your name and email.

TD Ameritrade offers 101 commission-free ETFs. Roughly, 90% of these offerings are iShares, SPDRs and Vanguard products. Thirty-seven ETFs are rated 4- or 5-stars by Morningstar. See the full list here.

And E*Trade offers 146 commission-free ETFs. Categories include: Fixed Income, Domestic Large, Domestic Mid & Small, International, Sector, Balanced and Alternative. If you’re a WisdomTree fan, you’ll be happy to know their ETFs make up 40% of E*Trade’s line-up. See the full list here.

By using any of these platforms, an investor could assemble a diversified portfolio of low-expense ETFs without paying a single commission.

Take the Schwab ETF OneSource platform. Here’s a sample portfolio I constructed for illustrative purposes:

This portfolio packs a big punch. These six ETFs provide exposure to 3,300-plus bonds … over 2,000 domestic stocks (giant, large, mid, small and micro) … more than 2,100 foreign stocks (developed and developing countries) … 100-plus REITs … and 17 commodities.

Plus, it has an average expense ratio of 0.18% and trades totally commission-free at Schwab.

Let’s say we make this a standard 60/40 portfolio. And assign the following weights: Fixed Income (40%), U.S. Equity (30%), Foreign Developed Markets Equity (10%), Emerging Markets Equity (10%), Real Estate (5%) and Commodities (5%). The weighted-average expense ratio drops to 0.09%. Again, zero commissions apply.

If you drop the high-expense ratio commodities portion, which is the only ETF — or asset class — with negative one-year, three-year and five-year returns in the group, the expense ratio falls even further. In the first case, the average expense ratio decreases from 0.18% to 0.06%. And in the second case (adding GCC’s 5% weight to SCHB), the weighed-average expense ratio declines from 0.09% to 0.05%.

The next time you’re considering an ETF transaction, make sure there isn’t a comparable ETF you can buy or sell for free.

Best,
Grant Wasylik

P.S. Be sure to examine the underlying index if it’s not a broad-based index like the S&P 500. It’s imperative to know what index your ETF is seeking to track and that corresponding index’s methodology.