What Is a No-Fee ETF?
A no-fee ETF, or zero-fee ETF, is anexchange-traded fund (ETF)that can be bought and traded without paying a commission or fee to a broker. An increasing number of brokerages have been offering investors the chance to buy or sell these securities for free in order to remain competitive with other platforms.
Key Takeaways
- A no-fee ETF, also known as a zero-fee ETF, is anexchange-traded fund (ETF)that can be bought and traded without paying a fee to a broker.
- Brokerages generally offer free trades to draw investors to their platforms and remain competitive — normally there's a charge each time an ETF is bought or sold.
- Sometimes ETFs are traded several times per day, so their no-fee counterparts can save investors a lot of money.
- However, free trading might result in fewer choices, as well as encouraging investors to trade more often and face steeper tax bills.
Understanding a No-Fee ETF
A no-fee ETF is generally usedto attract potentialinvestors to move their accounts to a new broker. Brokers offer to complete these trades for free in the hope of attracting new clients, who will also conduct more profitable trades with the same broker. No-fee ETFs can also make money by lending stock or offering lower interest on cash funds.
Exchange-traded funds aim to replicate the performance of a broad equity market or specific sector and can be traded on exchanges throughout the day just like an ordinary stock. Normally, a charge is levied each time an ETF is bought or sold. There may also be an annual fee to pay for the fund's administrative costs, paid out from the fund's assets or from stock dividends. Frequent traders or day traders may rack up substantial expenses that can quickly eat into any profits.
History of No-Fee ETFs
ETFs were first marketed as a low-cost alternative to mutual funds, where professional money managers choose a basket of securities in which to invest. Since it is rare for a fund manager to consistently beat the market, ETFs offer the advantage of tracking the market without the additional cost of employing specialized stock pickers.
The rate of commission charged for ETF trades can vary greatly between brokers, based upon what type of additional services they provide. Brokers that just conduct trades are likely to charge a lot less than brokers who provide additional advising or management services.
Important:
A trading fee can range anywhere from as low as $5 per trade to upwards of a few hundred dollars per trade, depending on the type of service offered by brokers.
During the 2010s, brokers and fund providers competed to attract new customers by cutting fees and commissions, ultimately resulting in an arms race towards zero costs. Charles Schwab, E*Trade, TD Ameritrade, and Fidelity each offered their own products with minimal or zero fees.
While these products did not earn a direct profit for the brokerage, intense competition and consumer demand left them little choice.Scottrade, an online brokerage with three million clients, was heavily criticized for the lack of commission-free ETFs, resulting in its closure in 2016.
A lack of no-fee ETF trades are considered to have contributed tothe end of Scottrade.
Criticism of No-Fee ETFs
No-fee ETFs have been applauded for helping investors to save money, but they also come with several drawbacks. Since these funds cannot charge fees and commissions, they must pay their administrative costs through other means, such as lending assets, selling other products, or cutting back on other client benefits.
One of the main scruples is a lack of choice. Index-tracking funds are comparatively inexpensive, but that limits investors to products that track broad market trends. Some no-fee ETF deals may be struck as part of a marketing arrangement with a particular asset manager, leaving investors with a limited range of funds in which to invest.
There have also been complaints that no-fee ETFs encourage investors to trade too much. Some behavioral analysts believe that eliminating commissions encourages frequent trading. Numerous studies show that this isn’t a good thing, as the more investors trade, the worse they tend to perform. Frequent trading also leads to higher tax bills because sales on positions held less than a year are taxed as ordinary income.
Special Considerations
Investors shouldn’t fall into the trap of believing that a no-fee ETF completely frees them from paying any kind of trading commission. In some cases, hidden costs can still crop up in the trading spread, or bid/ask ratio—a two-way price quotation that indicates the best potential price at which a security can be sold and bought at a given point in time. High spreads are particularly common among less liquid, sporadically traded ETFs.
FAQs
A no-fee ETF, or zero-fee ETF, is an exchange-traded fund (ETF) that can be bought and traded without paying a commission or fee to a broker.
Why is ETF not a good investment? ›
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
Are there ETFs without fees? ›
In a bid to attract cost-conscious investors, some ETF providers have begun to offer products with a 0% expense ratio. Yes, you read that correctly—these ETFs come without any management fees, making them essentially free to invest in (aside from the bid-ask spread and any other trading costs).
What are three disadvantages to owning an ETF over a mutual fund? ›
Disadvantages of ETFs
- Trading fees. Although ETFs are generally cheaper than other lower-risk investment options (such as mutual funds) they are not free. ...
- Operating expenses. ...
- Low trading volume. ...
- Tracking errors. ...
- The possibility of less diversification. ...
- Hidden risks. ...
- Lack of liquidity. ...
- Capital gains distributions.
Understanding Zero Brokerage Trading Accounts
Traditionally, brokers would charge a fee for each transaction based on the trade value. These charges could significantly affect the investor's profits, especially for high-volume traders. Zero brokerage accounts eliminate these transaction fees.
What is zero fee trading? ›
Zero brokerage models exist to change the traditional structure. The broker eliminates scaling charges by doing either one of the following: Offering ZERO brokerage on Equity delivery trading. This is a very attractive for Investors. Charging a flat fee per order traded.
What happens if an ETF goes bust? ›
As with traditional investment funds, ETFs have to place their underlying investments with a custodian. The fund provider cannot be both the fund manager, and the "guardian" of the assets. So if an ETF provider goes bankrupt, your investments are not gone cause they will still be kept by the custodian.
Why are ETFs performing so poorly? ›
There are a few reasons why ETFs generally die. Low assets under management, high fees, poor performance, and short track records are closely associated with the probability of closure. In 2023, there were 244 ETF closures with an average age of 5.4 years and average assets under management of only $54 million.
Should I put all my money in ETFs? ›
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
Is it smart to only invest in ETFs? ›
ETFs make a great pick for many investors who are starting out as well as for those who simply don't want to do all the legwork required to own individual stocks. Though it's possible to find the big winners among individual stocks, you have strong odds of doing well consistently with ETFs.
High fees can turn any investment into a poor one. A good rule of thumb is to not invest in any fund with an expense ratio higher than 1% since many ETFs have expense ratios that are much lower.
How do I know if an ETF is overpriced? ›
The price-to-earnings (P/E) ratio of an ETF measures the collective price of an ETF's holdings relative to their respective earnings. A high P/E ratio indicates that the ETF is overvalued.
Do you pay taxes on ETFs if you don't sell? ›
At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.
How long should you hold an ETF? ›
Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.
Why would anyone buy mutual funds over ETFs? ›
As we covered earlier, infrequently traded ETFs could have wide bid/ask spreads, meaning the cost of trading shares of the ETF could be high. Mutual funds, by contrast, always trade without any bid-ask spreads.
What is a zero brokerage ETF? ›
The rising number of investors in the stock market gave rise to the zero brokerage trading model. A zero brokerage trading account means the investor has to pay no brokerage charges. So, if a trader wants to make good returns on their investment, it's good to look for a zero brokerage trading account.
What is considered low fee ETF? ›
100 Lowest Expense Ratio ETFs – Cheapest ETFs
| Symbol | Name | Expense Ratio |
|---|
| SPLG | SPDR Portfolio S&P 500 ETF | 0.02% |
| BBUS | JPMorgan BetaBuilders U.S. Equity ETF | 0.02% |
| BND | Vanguard Total Bond Market ETF | 0.03% |
| AGG | iShares Core U.S. Aggregate Bond ETF | 0.03% |
96 more rowsETFs don't often have large fees that are associated with some mutual funds. But because ETFs are traded like stocks, you may pay a commission to buy and sell them, although there are commission-free ETFs in the market. To be fair, mutual funds do offer a low cost alternative: the no-load fund.
What is a good ETF fee? ›
A good rule of thumb is to not invest in any fund with an expense ratio higher than 1% since many ETFs have expense ratios that are much lower. Also, ETFs tend to be passively managed, which keeps the management fee low.
