Trade ETFs for Free

“Can I buy and sell ETFs without paying any commission fee?”

Yes, you can. Actually, you don’t need to have a lot of money to trade exchange-traded funds (ETFs) for free these days and your choices of where to get commission-free ETFs are plenty.

As Exchange Traded Funds (ETFs) continue to gain popularity among cost-conscious investors, the number of brokers that let their customers trade ETFs (of course only a small subset of all available ETFs, not all of them) for free are growing in recent years. Right now, not only heavy weights in the brokerage industry, such as Vanguard, Fidelity, and TD Ameritrade let their customers trade a selected number of ETFs for free, smaller players like Scottrade and Firstrade have also attractive offers for investors with small funds.

I think the reason that more and more brokers started to allow their customers to trade ETFs without commission, even in most cases the number of commission-free ETFs offered by the broker is rather small compared to the total number of ETFs that’s available, is that ETFs are increasingly popular among investors who want both diversification and the flexibility to trade. Even though ETFs are essentially mutual funds, they are structured differently such that they can be traded just like individual stocks. That’s not possible for traditional mutual funds, which are priced once a day at the close of trading. Another benefit of investing with ETFs is low cost. Because of the way ETFs are constructed, their expense ratios (ERs) are usually lower than their mutual fund counterparts. So even for buy-and-hold type investors who in the past favored low-cost mutual funds over individual stocks, ETFs have become a valid option to build a well diversified portfolio. A few years ago, when ETFs were still quite new, it wasn’t that easy to find all the asset classes that you needed to build a well diversified all-ETF portfolio. Now you can find everything you need in ETF because both the number of ETFs offer and the total assets under management have bloomed in the past a couple of years. According to a report by Investment Company Institute (ICI), the total number of index-based ETFs has grown to 1,134 with total assets at $1,048 billions. ETFs may be yet to reach the level to rival traditional mutual funds, but the momentum seems on the ETF side in terms of growth.

Despite the above mentioned advantages that ETFs have over mutual funds, one big issue with ETFs is the trading cost. Since ETFs are traded on exchanges just like individual stocks, every time you buy or sell shares of an ETF, you will have to pay a commission for the transaction to your broker. That makes using methods like dollar cost averaging (DCA), which is the preferred way to build a mutual fund investment portfolio, to build an all-ETF portfolio much more difficult, and costly too. For mutual funds, you can buy $100 worth of shares of a fund every month, or whatever the frequency you prefer, and incur no additional costs. This DCA method allows you to contribute a small amount regularly. For ETFs, on the other hand, it doesn’t make too much sense if you buy $100 and pay $7 in commission (Scottrade charges $7 per trade for stocks or ETFs). However, the introduction of commission-free ETF trades at a number of brokers makes its possible to also DCA ETFs.

Following is table of brokers that current offer commission-free ETF trades for their customers, along with some basic information about the broker. Links to my previous discussions on each broker are also provided if you want to learn more about the broker and their no-cost ETFs.

Trade ETFs for Free

As you can see from the above table, you don’t need to have a lot of money to open an account with Scottrade or Firstrade, even though their offerings are quite small comparing with the other four. Hopefully, over time, they can have add more commission-free ETFs so investors can have more choices to build a well diversified ETF portfolio.