Commission-free trades on an exchange traded fund (ETF) are a beautiful thing if you’re an investor who’s seen returns eroded by sundry fees. But it’s important not to become too caught up with the notion of no-transaction fees at the expense of other factors in determining an ETF’s merits.
Many investors have been vexed by commission fees that erode returns, writes Carolyn Bigda for Chicago Tribune. That reality made Schwab and Fidelity‘s decision to waive fees on a number of ETFs “a lovely light shining down for clients who have not been able to take advantage of ETFs,” says Stacy Francis, financial planner.
The average annual expense ratio on ETFs is 0.5%, whereas mutual funds with similar investments have an average expense ratio of 0.9%. But a commission-free trade, while great, shouldn’t be the only lure that hooks you into one fund over another. [Fidelity Announces Free Trading.]
Quality. Look at an ETF’s track record and do some homework and find out what an ETF tracks and how the fund tracks it. Additionally, just because afund has no transaction fees doesn’t necessarily mean that it is a good fit for you. Consider what you own and proceed accordingly. [Know Your Holdings.]
Total cost. There are two costs involved in trading ETFs: the commission and the annual fee. Which cost is more important depends on how you’re trading. If you use a buy-and-hold strategy, the commission will be charged once, but you’ll be charged management fees once every year. If you’re making small day trades, commissions can accrue rather quickly, in which case you may be better off with an ETF that doesn’t charge the transaction fee. [Schwab’s Commission-Free ETFs.]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.