Dollar-cost-averaging with ETFs: Bad Idea?

I became a big fan of ETFs (Exchange Traded Funds) in December 2004 when I sold my Matthews China Fund (MCHFX) holdings at Scottrade after it started to charge fees for no-load mutual funds and switched to PowerShares’ Golden Dragon Halter USX China (PGJ), 10 days after its inception.

Now I own seven PowerShares ETFs, PGJ, PEY, PFM, PHO, PID, and PSI, with total market value of more than $26600 as of today. Among the reasons that I like ETFs are:

  1. they are priced as stocks, not mutual funds, therefore I can purchase them at any time during the trading hours;
  2. many ETFs are designed to track some popular indices, just like index mutual funds, giving them broad coverage;
  3. for sector EFTs, the fees are usually lower than their mutual fund counterparts;
  4. EFTs can be purchased at any discount brokerage firm, while for mutual funds, many brokerage firms charge fees even for no-load funds.

The obvious disadvantage of EFT trading is commissions. Since they are traded as stocks, ETFs have the same fee schedules as stocks and that makes dollar-cost-averaging (DCA) ETFs a costly practice as the commission is added on top of the expense ratio (ER) the ETF carries (same as mutual funds). The ER (given as percentage points) actually doesn’t affect ETF DCA as it is only related to the size of the investment, and every mutual fund carries it as well. What matters is the fees brokerage firm charged for every trade.

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Because of such concerns, I only add new money to two of the seven EFTs, PEY and PFM, regularly. For PEY, currently at Firstrade, I buy about $200 every two months and the commission is $6.95, equivalent to an additional 3.6% fees. My PFM is at Sharebuilder and I buy $200 every month for $4 per trade. Since I opened my Sharebuilder account through Costco, I can get 25% quarterly reimbursement (for executive members, 10% for gold star member) of the commission and that makes the costs at $3 per $200 invested. Though the fees are not terribly high for each transaction, it could be a significant burden if I keep building my positions for years, which I intend to do at least for PEY as it pays monthly dividend.

Is there any cheap alternatives? Zecco may be a candidate as they not only offer free trade, but also free dividend reinvestment, making it perfect for DCA ETFs. However, the only problem I have with Zecco is their short history. Opening their shop only this month, it’s hard to say how successful their business model will be and how long, if at all, they will keep their current fee structure. I have thought about getting an account at Zecco when first learned they offer free dividend reinvestment, but decided later to wait a while to see things work out with them. Once they establish a good tracking record, I will definitely consider moving PEY over.

As for now, what else can I do to reduce the costs of DCA ETFs?

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