Free Trade: Brokerages to Continue No-Commission Trades for ETFs

Exchange-traded funds have gained market share compared to mutual funds, but brokerages say that won't make them raise their commissions.
Exchange-traded funds have gained market share compared to mutual funds, but brokerages say that won't make them raise their commissions.

In an attempt to attract investors to exchange-traded funds, several brokerages have been offering "no-commission trades," meaning that investors can trade ETFs without paying commission fees. As the popularity of these funds has grown, gaining market share against mutual shares, some have wondered whether ETF providers might start charging commission again.

But it looks like those trades will remain free in the foreseeable future. At a press briefing in New York on Tuesday, several of the largest ETF providers said they will continue to offer no-commission trades. Executives from iShares, State Street Global Advisors (STT), Invesco Powershares and Charles Schwab (SCHW) said the free trades have given the funds an attractive cost advantage over mutual funds and have successfully drawn investors to ETFs, a relatively new investment vehicle.

The Trend Toward Free Trades

While some brokerages started offering no-commission trades as early as 2006, several experts point to Schwab's decision to cut its commission last year as a milestone for the trend. The company, which manages approximately $1.4 billion in ETF investments, eliminated commissions on trades of its branded ETFs for its clients last November.

The move pressured other ETF providers to match Schwab's no-commission policy as they struggled to gain assets in a volatile investment environment. And eliminating those trading costs has helped convince investors, who remain risk averse as they work to recover their losses from the market crash triggered by the 2008 financial crisis, to take the plunge.

It also has also made the funds affordable for smaller investors, says Peter Crawford, senior vice president for Schwab, which plans to continue offering no-commission ETF trades. "If you're losing 2% of your money in a commission, unless you are holding it for a very, very long period of time that could certainly eat away at it profits," he says.

Keeping Up a Low-Cost Image

Of course, increasing ETF costs would likely be a bad public-relations move given that ETFs have been marketed as a low-cost investment from their inception. "It would be hard to change that trend," says James Ross, senior managing director of State Street Global Advisors. Aside from offering the no-commission trades, Schwab cut the expense ratios on its ETFs in June, again pressuring other providers to follow.

"It just keeps getting better for the individual investor and fund advisors," says Tom Lydon, president of ETF Trends, a website that provides data on the ETF industry. Overall, expense ratios for ETFs are falling, making them even more attractive to investors, he says.

As long as companies can cover their costs with minimal fees and continue to add assets to their ETFs, they can continue to make money and not be hurt by waiving commissions on trades. That means that no-commission trades -- and lower costs -- are likely here to stay.