It looks like buying ETFs without commission is getting a lot easier these days. Late last week, Charles Schwab, the brokerage firm that introduced no-transaction fee mutual fund supermarket 20 years ago, announced the creation of the equivlant of ETF supermarket, called Schwab ETF OneSource. The online ETF trading platform allows Schwab customers to buy and sell 105 exchange-traded funds (ETFs) without the usual commission fees charged by stock brokers under normal circumstance (since ETFs are traded like stocks, trading commissions usually apply for each transaction).

So what’s the big deal about this? Well, one of the proven strategies of long-term investing is dollar cost averaging (DCA), which lets investors accumulate shares by investing a small amount each time (such as $100 per month), eliminating the burden of having to come up with a large lump sum of money and the concern of when to invest. DCA works very well for mutual fund investing because there’s no fee involved in subsequent investments with the fund firm. For ETFs, however, DCA doesn’t make too much sense if the investor has to pay a fee for each transaction (brokers charge the same amount of commission for ETF trading as for stocks). You don’t want to pay $5 (TradeKing) or $7 (Scottrade) commission when buying $100 worth of an ETF, do you? Now with commission-free ETFs, using dollar cost averaging to build an all ETF portfolio becomes possible.

Related: How to Buy and Sell ETFs for Free

In the past a couple of years, we have seen more and more firms start offering their clients zero-commission ETFs. There are firms like Vanguard which only have their own ETFs free of commission for their customers. We’ve also got companies like Fidelity and TD Ameritrade, which don’t have their own ETF offerings, but arrange to have third-party funds available for investors commission free (TD Ameritrade also has more than 100 commission-free ETFs). In the case of Charles Schwab, it’s a mix of both. As I have discussed before, Schwab has its own low-cost ETFs (some even beat Vanguard in terms of expenses) that are already commission-free for Schwab brokerage account customers. With the introduction of Schwab ETF OneSource, Schwab increased the number of commission-free ETF offerings to 105 by including funds from other ETF providers such as State Street (SPDR), PowerShares, Guggenheim, ETF Securities, and U.S. Commodity Funds. If you are an ETF investor, then you must have known, maybe even already owned, some of the biggest ETFs out there, like SPDR S&P 500 (SPY), PowerShares QQQ (QQQ) and SPDR Gold Shares (GLD). Now there are all available commission-free at Schwab ETF OneSource. If the ETF supermarket continues to grow, then we can expect that more funds will be available with zero trading commission in the future.

In addition to the ETF OneSource platform, Schwab also launched ETF Portfolio Builder for those who are interested in building a diversified portfolio using nothing but ETFs. With the Portfolio Builder, you can either select a pre-defined portfolio, such as Conservative, Moderately Conservative, Moderate,
Moderately Aggressive, or Aggressive, or, if you are a self-directed investor, build one of your own with the 105 available ETFs based on your asset allocation.

Related: What’s Asset Allocation and Why It Is Important

So, what do you think of this new Schwab ETF supermarket? Is it a real “game changer” in the ETF industry?

My first impression is that it’s pretty nice to be able to trade some very popular ETFs, like those mentioned above, free of commissions, but I won’t call it “game changer” just yet, because both Fidelity and TD Ameritrade already have more than 100 commission-free ETFs for their customers. In that sense, there’s no difference to me whether those ETFs are offered on a dedicated platform like Schwab ETF OneSource, or just like any other ETFs.

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Update: Last week I wrote about how you can buy ETFs without paying any commission and in the article, I listed Scottrade as one of the brokers which currently offers commission-free ETFs to its customers. The information I had in the article about Scottrade ETFs was from the March 2011 Scottrade announcement when those commission-free ETFs were first launched. Even though I am a Scottrade customer (thus the email from March 2011, I don’t own any of those commission-free ETFs, thus I am not entirely clear about the current status of those ETFs. And I am wrong assuming they are still available.

After the article was published, I was contacted by Scottrade and pointed to another Scottrade announcement this past August when FocuseShares decided to shut down all 15 ETFs offered through Scottrade and liquidate all the assets held in those funds. The following the main reason cited for the liquidation:

The Board considered current market conditions, the inability of the Funds to attract significant market interest since their inception, and their future viability as well as prospects for growth in the Funds’ assets in the foreseeable future. The Board determined that it was advisable and in the best interests of the Funds and their shareholders to liquidate the Funds, which are listed for trading on NYSE Arca.

Somehow, I missed the announcement and I didn’t think I got any email communication either. Anyway, it was quite shocking to learn all the funds were shut down after such a short period of time, I wasn’t that surprised by the “news”. Unlike other brokers listed my commission-free ETFs table, Scottrade took a different approach by offering its customers totally new ETFs created just for Scottrade while others worked with major ETF providers, such as Vanguard, iShares, State Street, and PowerShares, to offer funds that have been around for a while. Given the pace the ETFs have expanded in recent years, it’s not difficult to see why Scottrade, and FocusFuns, isn’t alone in closing funds that have failed to attract any interests among investors. After all, there are so many choices already in the ETF arena and it’s very easy to find one popular ETF in every asset category to build a well diversified all-ETF portfolio.

That said, I still hope that Scottrade will, like other brokers, work with existing major players in the ETF industry to offer its customers no cost exchange-traded funds.

The following was part of the original article published in March 2011.

The news that Scottrade was preparing to offer its own low cost Exchange-Traded Funds (ETFs) has been out for some time. Yesterday, the popular online discount broker announced investors can now trade a suite of FocusShares Scottrade ETFs that currently consists of 15 diversified funds, all tracking indices developed by Morningstar and all with the lowest expense ratio (ER) in their respective category, ranging from 0.05% to 0.19%. The ERs were even lower than Vanguard ETFs, which are pretty much the benchmarks of the industry when it comes the costs of investing in ETFs, as well as mutual funds.

Scottrade Low-Cost ETFs

The new Scottrade ETFs and their ERs are listed below.

• Focus Morningstar US Market Index ETF (FMU): ER 0.05%
• Focus Morningstar Large Cap Index ETF (FLG): ER 0.05%
• Focus Morningstar Mid Cap Index ETF (FMM): ER 0.12%
• Focus Morningstar Small Cap Index ETF (FOS): ER 0.12%
• Focus Morningstar Basic Materials Index ETF (FBM): 0.19%
• Focus Morningstar Communication Services Index ETF (FCQ): ER 0.19%
• Focus Morningstar Consumer Cyclical Index ETF (FCL): ER 0.19%
• Focus Morningstar Consumer Defensive Index ETF (FCD): ER 0.19%
• Focus Morningstar Energy Index ETF (FEG): ER 0.19%
• Focus Morningstar Financial Services Index ETF (FFL): ER 0.19%
• Focus Morningstar Healthcare Index ETF (FHC): ER 0.19%
• Focus Morningstar Industrials Index ETF (FIL): ER 0.19%
• Focus Morningstar Real Estate Index ETF (FRL): ER 0.12%
• Focus Morningstar Technology Index ETF (FTQ): ER 0.19%
• Focus Morningstar Utilities Index ETF (FUI): ER 0.19%

To give you a sense how low the Scottrade ETF ERs are, here’s a comparison chart of ERs of funds from some larger and more popular ETF issuers, including Vanguard, iShares, and SPDR.  For example, Scottrade US Market Index ETF (FMU) has an ER of 0.05%. In the same category, Vanguard Total Stock Market ETF (VTI)’s expense ratio is 0.07% while iShares Dow Jones U.S. Total Market Index Fund (IYY) has an ER at 0.20%.

As you can see, the Scottrade Focus ETFs definitely look attractive to cost savvy investors who always keep an eye on the cost of owning a fund in the long term. However, as you also may know, cost isn’t the only consideration when it comes selecting which ETF to invest in. There are also tracking errors and ETF trade spreads to consider. I am not very familiar with Morningstar indices, but I assume that they are relative new and not widely used as other indices, for example, MSCI indices. Therefore, even for funds that target the same sector such as the broker, their performances could be different because their underlying indices are constructed differently. As for the ETF spreds, since all these Scottrade ETFs are new, their trading volumes will be low, especially at the beginning. This could lead to wider bid/ask spread because the new Scottrade ETFs are not as liquid as those ETFs with large daily trading volumes. For investors, a wider spread means additional cost of actually owning the fund, in addition to the obvious costs such as ER and commission.

Looking for a cheap stock broker to trade stocks, ETFs, or options? Check out Options House ($3.95/trade, $1,000 minimum, free 1-yr Barron's subscription, review) Zecco Trading ($4.95/trade, no minimum, review) TradeKing ($4.95/trade, $500 minimum, review) Firstrade ($6.95/trade, no minimum, review) Scottrade ($7.00/trade, $500 minimum, 3 free trades, review)

Commission Free ETFs for Scottrade Customers

Speaking of the total cost, the good news is that if you are a Scottrade customer, you can buy and sell all these Scottrade ETFs for free. It seems to have become a trend since 2009 that, as ETFs are getting more and more attentions from investors (the total number of ETFs offered recently passed 1,000), brokerage firms began to offer them free of commission charges to their customers. So far we got Charles Schwab, Vanguard, Fidelity, and TD Ameritrade, all having a number of commission-free ETFs, either their own funds or from third parties. Now that Scottrade has joined the party with their own low-cost ETFs, the competition just got heated up a notch again, which is good because now we have more choices to trade ETFs for free.

If you are not familiar with Scottrade, you can read more about the broker in my Scottrade review post. For investing in ETFs, I also have a post on how to buy ETFs, with information on free ETF offers from other brokers.

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“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.

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I have always wanted to build a portfolio consisting of dividend-paying stocks that could generate passive income for us in the long term. The plan is to continuously investing in stocks with high dividend yield such that distributions from the portfolio will someday make up a significant portion of our income when we can no longer count on our salaries.

As part of the plan, I started investing in dividend-paying ETFs such as PowerShare High Yield Equity Dividend Achievers Portfolio ETF (PEY) through my brokerage account at Scottrade. But that didn’t last long and I sold all my position in PEY because Scottrade didn’t allow free dividend reinvestment, which is essentially all I want to have at this stage. I mean, right now I don’t’ want to collect distributions as cash. I would rather have them reinvested so I can continuously add shares. Of course, I can use the distributions to buy shares myself, but there are things I really don’t like about doing it manually. First I will have to pay $7 commission for each transaction with Scottrade, which is a significant amount considering the dividends received. Second, I can’t reinvest all the dividend payout since Socttrade doesn’t allow fractional shares either. I want dividends to be reinvested automatically, and I want it done free. I didn’t give up on dividend-paying ETFs, but I do need to find an alternative to PEY that allows me to DCA without commission. One possible candidate is Vanguard High Dividend Yield (VYM), which has to be invested directly with Vanguard to avoid trading commission.

Another element of my long-term plan is investing in high dividend yield stocks, mostly purchased through Direct Stock Purchase Plan (DSPP) through ComputerShare (see my post on how to buy stocks from ComptuerShare). Since early 2006, I have bought dividend-paying stocks including Bank of America (BAC), Procter & Gamble (PG), ExxonMobile (XOM), Boston Properties (BXP), Progress Energy (PGN), and my latest addition Union Pacific (UNP) through ComputerShare and have been DCA every month since the initial purchase. ComputerShare offers lot of stocks, either through DSPP or DRIP (Dividend Reinvestment Plan), but I only buy those without dividend reinvestment fee to lower the overall investment costs. Except BAC, which now pays a symbolic 1 cent per share quarterly dividend, all other stocks work out pretty well for me so far.

As I look for more options to add to my investments recently, I started to consider whether to add Master Limited Partnerships (MLP), which primarily focus on oil and natural gas pipelines and are known for paying handsome dividends to investors. However, due to the complicated tax issues involved in investing directly with MLPs (K-1 tax reporting), I am thinking of using MLP mutual funds or ETFs instead because they not only reduce the burden at tax filing time (getting 1099 forms instead), but also provide diversities (within the MLP sector of course), even though that means giving up some tax benefits of investing in MLPs directly.

MLP Mutual Funds

The first MLP mutual fund was launched two years ago by SteelPath and the firm currently manages a few funds specializing in MLPs, including SteelPath MLP Alpha Fund, SteelPath MLP Income Fund and SteelPath MLP Select 40 Fund. However, when I looked at these funds, I was immediately turned off because not only they all charge front loads, but also have a rather high expense ratio at 1.50%. I have never bought any fund with load before and I won’t this time, even though the funds have quite nice yields.

MLP Closed-End Funds

Closed-end funds (CEFs) are more like ETFs than traditional mutual funds in terms of how you can buy and sell them because they are traded just like stocks. There are two closed-end MLP funds on my radar. One is Tortoise MLP Fund (NTG) and the other is Cushing MLP Total Return Fund (SRV). Between the two, I like SRV better because of it has better dividend yield currently at about 9% with an expense ratio of 3.39%, which is higher than that of NTG at 1.39%. But SRV is currently selling at 25% higher than its actually NAV, making me think twice about it.

MLP Exchange-Traded Funds and Notes

Finally, there are also a few options in ETFs. ALPS Alerian MLP ETF (AMLP) is the first MLP ETF launched in August 2010. The fund current has a 12-month yield of 5.9% with an expense ratio at 0.85%. Yorkville High Income MLP ETF (YMLP) is the newest member in the MLP ETF category with an expense rate at 0.82%.

The JP Morgan Alerian MLP Index ETN (AMJ) is by far the largest MLP Exchange-Trade Notes (ETNs) out there, which is also the most heavily traded ETN. AMJ has a 12-month yield of 4.7% to go with an ER of 0.85%. Other MLP ETNs include Credit Suisse Cushing 30 MLP Index ETN (MPLN) and UBS E-TRACS Alerian MLP Infrastructure ETN (MLPI).

Looking at the above options in investing in MLPs, I haven’t decided which one to use eventually, but my focus has narrowed down to between SRV and AMLP. Both can be bought and sold at any time as they are exchange-traded. I like SRV’s yield, but it’s selling at a hefty premium. As for where to buy, I will probably use TradeKing instead of Scottrade because TradeKing allows free dividend reinvestment.

Photo credit: Travis S.

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Competition is always good because it gives us more choices. As we have witnessed in the brokerage industry, competition has forced more and more brokerage firms to offer commission free exchange-traded funds (ETFs) to their customers since late 2009 when Charles Schwab became the first broker to let its customers trade ETFs without commission fees. Schwab’s move was soon followed by similar offerings from Vanguard, Fidelity, TD Ameritrade, all allowing investors to buy and sell ETFs, either their own funds or funds from third parties, for free. Last month, Scottrade joined the competition by launching its own ETFs. All the 15 FocusShares ETFs Scottrade offered not only are commission free for Scottrade customers, but also have the lowest expense ratios (ER) among funds that belong to the same asset classes. Commission free trading plus low ER could mean big saving over time because the combination of the two will lead to lower overall cost of owning these exchange-traded funds.

Now, investors who are looking to build a diversified all-ETF portfolio have one more options to trade ETFs for free. Firstrade, a popular online discount broker, announced today that Firstrade customers can now buy and sell 10 most popular ETFs with no cost. Unlike Scottrade which issued its own ETFs and made them free to Scottrade customers, Firstrade took the similar approach as TD Ameritrade did, that is, the Firstrade commission-free ETFs are not its own, but from Vanguard, iShares and PowerShares. The full list of Firstrade commission-free ETFs and their ERs is in the following.

• Vanguard Long Term Bond ETF (BLV): ER 0.11%
• Vanguard Intermediate Term Bond ETF (BIV): ER 0.11%
• Vanguard Short Term Bond ETF (BSV): ER 0.11%
• Vanguard Small Cap Growth ETF (VBK): ER 0.12%
• iShares S&P MidCap 400 Index Fund (IJH): ER 0.20%
• Vanguard Dividend Appreciation ETF (VIG): ER 0.23%
• Vanguard Emerging Markets ETF (VWO): ER 0.22%
• iShares S&P 500 Index Fund (IVV): ER 0.09%
• PowerShares DB Commodity Index Tracking Fund (DBC): ER 0.81%
• iShares FTSE/Xinhua China 25 Index Fund (FXI): ER 0.72%

When I wrote about Scottrade’s new ETF offerings, I mentioned that since those ETFs are very new, their trading volumes are likely to remain low for some time, which could lead to a higher overall cost due to the wider bid/ask spread. This, however, will not be the case for ETFs offered by Firstrade since the above funds are all well established. In fact, VWO and FXI are even among top 20 most heavily traded funds based on Morningstar data.

Also, as you can see from the above list, these ETFs are nicely diversified with exposure in stocks (domestic and international), bonds (domestic and international), and commodity. Using the asset allocation plan that I discussed before when creating my own all ETF portfolio, I can almost build the portfolio with these commission-free ETFs from Firstrade, except there is no REIT and Gold fund. However, since DBC has exposure to both gold and silver, including DBC in the portfolio would still work.

If you are not familiar with Firstrade, you can find out more about the broker in my updated Firstrade review post. Basically, you will pay $6.95 when buying or selling stocks plus another $1.25/contract for options trading. Firstrade’s stocks and options trading commissions are almost identical to Scottrade’s, but the cost for mutual fund trading is much lower at Firstrade ($9.95) than at Scottrade ($17). See my stocks and options broker compare page for detailed comparison of Firstrade against other brokers.

BTW, Firstrade requires that the commission-free trades on the 10 eligible ETFs must be placed online, not with broker’s assistance. Though buying any of these ETFs is commission free, if you sell an eligible ETF within 30 days of purchase, you will be charged with the regular $6.95 online commission fee.

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