A number of popular brokerage platforms offer commission-free exchange traded fund trades. However, this is not an open invitation to day-trade your investment portfolio.
For instance, Fidelity Investments, TD Ameritrade, Charles Schwab, E*Trade, Vanguard and Merrill Lynch provide investors with access to commission-free trades on a number of ETFs. [Popular Commission-Free ETFs on Schwab OneSource]
“There are no specific advantages other than there is no cost to trade, so these are definitely more beneficial for smaller-sized accounts,” JJ Feldman, investment manager for Miracle Mile Advisors, said in a U.S. News article.
However, the ability to trade an ETF freely without any commission fees could entice investors to trade them more frequently.
“That potentially could be a bad thing, as market timing is virtually impossible,” Feldman added.
Investors should also look at a commission-free option as a bonus, rather than a deciding factor in choosing an ETF.
“Some ETFs are market-cap weighted, fundamentally weighted or dividend-weighted,” Feldman added. “The most important thing is to identify the ETFs that you like based on their strategy and risk-return profile.”
Vern Sumnicht, founder and CEO of iSectors, also warns that since there are a limited selection of commission-free ETFs to choose from, investors may only find ETFs with higher than average expense ratios. So, advisors and investors should consider the trade off between commissions and ETF expense ratios. [Advisors Flock to Commission-Free ETFs]
As brokerage firms advertise their commission-free options, investors should also look at the fine print. For instance, Paul Jacobs, chief investment officer of Palisades Hudson Financial Group, points out that Fidelity charges a short-term trading fee of $7.95 for sales within 30 days to deter day-traders.
Additionally, a number of ETFs trading with commission-free access are there because fund providers want the products to gain more attention, which means that some of the ETFs may have low trading activity.
“Some ETFs have very lumpy trading, and while they have a high average volume, they see little or no shares trade hands most days,” Jacobs said. “So if we’re looking to do a medium or large-size trade, it’s important we understand what trading volume is like each day, not just on average.”
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.