Understanding Exchange-Traded Funds (ETFs) and the Concept of Commission-Free Trading

Exchange-Traded Funds, or ETFs, are investment vehicles that hold a basket of assets such as stocks, bonds, or commodities, and trade on exchanges like individual stocks. While the concept of commission-free ETF trading might seem like a myth, it's actually the commission that brokers charge, not an inherent characteristic of ETFs themselves.

Commission is Not Intrinsic to ETFs

Let's be clear: it is not the case that an ETF can be bought or sold without paying a commission; the commission is always what a brokerage charges for the transaction. This fee is a flat rate or a percentage of the trade amount, and it is not part of the ETF's structure.

However, certain brokerages have strategies to differentiate themselves by offering commission-free trading on select ETFs. As an example, Vanguard, which is both a brokerage and a fund manager, historically assessed a 25 broker-assisted fee for phone-based orders of non-Vanguard ETFs while waiving that fee for its own ETFs. But this practice is becoming less common, especially after Charles Schwab ended commissions for stock trading in 2019. Today, it is relatively rare to see commissions for online orders of ETFs among US brokerages.

Commission-Free ETFs

Commission-free ETFs specifically refer to ETFs that do not have any trading costs associated with them. These ETFs trade on an exchange in a manner similar to stocks, meaning that there are commissions or transaction fees. These fees typically range between 10 and 20 per trade, in most brokerage firms.

It's important to understand that offering commission-free trading on certain ETFs is a marketing strategy, not a universal rule. Some brokerages justify this by using the funds to promote their own ETFs or to attract new customers.

The Economics Behind Commission-Free Trading

Would you open a food store and give away the food that you stock in it for free? Do you know the expenses that the manager of these enterprises has to meet? Have you seen banks giving away their services for free? There is no such thing as a free lunch in the financial world. If you want something in this world, you have to pay for it.

ETFs are just like any other shares. However, some brokerages may charge less, as a result of competitive strategies, customer loyalty programs, or as part of a larger financial advice package. If you are a professional trader, your focus should be on brokerages that offer profitability against risk, rather than just commission-free trades.

Conclusion

Commission-free ETFs certainly have their allure, but they are not the only consideration when choosing a brokerage. Factors such as portfolio management tools, customer service, and the range of financial advice available also play significant roles. Whether you are a passive investor, a day trader, or a financial advisor, the cost structure should be just one part of your decision-making process.

Keywords

Exchange-Traded Funds (ETFs), commission-free trading, financial advice