August 21, 2014

The Best Online Brokers with Commission-Free ETFs for Buy-and-Hold Investors

The number of online brokers can be daunting. The commission and fee structures offered can vary widely, and each broker often targets specific types of investors or traders. Trying to determine which broker will be the most cost-effective option for your specific needs can be tricky. Do you trade equities only? Do you have a preferred family of funds? Do you trade options or forex? How frequently do you trade? The answers to these questions can have a huge impact on which broker offers you the best overall package. Sometime, you may find it makes more sense to spread you investments across a few different brokers. Perhaps your retirement funds are with one broker, your cash account is somewhere else, and so on.

That being said, the brokers that tend to be of most interest to those of us who predominantly invest in ETFs are those that let us trade them for free. More specifically, I wanted to find out which brokers are most attractive to investors that not only want to trade ETFs for free, but hold them long-term. Whereas mutual fund investors tend to mostly be of the buy-and-hold variety, ETF investors are often split among the buy-and-hold crowd who love them for their low expenses, and traders who love that they can actively trade wide segments of the market.

There are currently seven online brokers that offer commission-free ETF trading. Their selections vary widely:

Comparing commission-free ETFs from Charles Schwab, E*TRADE, Fidelity, Firstrade, Interactive Brokers, TD Ameritrade, and Vanguard

In terms of pure selection, you'll notice that Schwab, E*TRADE, and TD Ameritrade look like the winners here. Although quantity doesn't always tell us much. Some of the brokers with the most commission-free options have overlap among their funds. And although Fidelity and Vanguard appear to have fewer choices, both the iShares and Vanguard families of ETFs are extremely comprehensive, covering a wide enough number of segments for most investors. Schwab offers a great set of core ETFs, as does State Street with their SPDR ETFs, so between the two you'll find almost anything you need at Schwab. Likewise with TD Ameritrade.

There might be one or two brokers on this list, along with a few fund families, you haven't heard of. Firstrade is probably the smallest broker on this list. At first glance, it looks like they offer some incredible fund families: Vanguard, iShares, and PowerShares - three of the biggest. Unfortunately, while they have a handful of solid core Vanguard funds, there's just one iShares China ETF (FXI) and one PowerShares Commodity fund (DBC).

Online stock trading on an ancient computerInteractive Brokers is quite a bit more well-known. Their trading platforms and technology is incredible. The company caters heavily to active traders and their commission structure is perhaps the best in the industry for high-volume traders and professionals who need access to a broad set of products and direct access trading. It's certainly interesting that they offer commission-free ETFs, but Global X Funds tend to offer more niche products that may be of more interest to sophisticated investors, including Global X Guru Funds that allow investors to tap into hedge fund trading ideas (perhaps not best for buy-and-hold guys like me), Asian, Latin American, and frontier markets, as well as Greece and Norway ETFs.

On average, you'll notice that the Interactive Brokers' commission-free ETFs have some of the highest expense ratios across brokers, and Firstrade charges an account inactivity fee for $19.95 for account-holders who haven't traded in the past 24 months or hold less than $2,000. While both brokers offer a ton of value for active traders (seriously, IB is phenomenal), other brokers target long-term investors more heavily.

E*TRADE offers a lot of commission-free funds in terms of quantity (but some of the highest average expense ratios across their offerings), but you can see Global X is one of them. The Deutsche X-trackers family likewise provides more niche offerings, including China-focused ETFs, along with currency-hedged, and commodity choices. WisdomTree is really the only fund family from E*TRADE that's a bit more mainstream and offers funds you might be able to build the core of your portfolio around. Even then, rather than typical growth, value, or blend options, WisdomTree offers ETFs based on their Earnings and Dividend indexes. These are fundamentally (not market cap) weighted indexes and tread much more into an active management strategy. Unless you think earnings-weighting or dividend-weighting is going to provide superior returns, you may want to look elsewhere.

IB, Firstrade, and E*TRADE aside, I'd highly recommend Schwab, Fidelity, TD Ameritrade, and Vanguard as the first places to look for buy-and-hold investors. Each of the four provides a set of commission-free ETFs that most investors can build around, and commission between $7 and $9.99 make it easy to purchase other equities at a reasonable cost.

I far prefer investing in blend ETFs, as I haven't found a compelling reason to tilt or weight my portfolio more heavily toward growth or value stocks. I pulled out a selection of blend funds from each of the four brokers I recommend, and compared offerings for each segment side-by-side across brokers. Some offer a couple of options in each category, so I chose the ETF with the lowest expense ratio in those instances.

Click to Zoom
Core blend ETFs from Fidelity, Schwab, Vanguard, and TD Ameritrade
I highlighted the lowest cost fund in each segment, but take that with a grain of salt. I love Schwab for having the absolute lowest-cost is most cases, but although the iShares funds from Fidelity are often the most expensive, the difference is mostly negligible. For example, a 0.07% expense ratio for the iShares ITOT isn't going to massively impact your returns in comparison to Schwab's 0.04% SCHB ER. They're both incredibly low. Schwab's strategy seems to be to undercut Vanguard by 0.01% wherever they can, and it seems to be paying off as Schwab has amassed healthy assets for most of their offerings. Note: VSS is mostly an international developed markets small-mid ETF, but does contain a small amount of emerging markets holdings.

So which brokers are best for buy-and-hold ETF investors? I highly recommend Schwab (from personal long-time experience, including their customer service) and Vanguard. TD Ameritrade offers most of Vanguard's ETFs commission-free, but I love Vanguard and would generally prefer to have access to their full selection plus Vanguard's generally lower commission structure.

Fidelity's iShares selection is excellent, but once you get outside the most mainstream ETF categories, I have a hard time justifying the higher expense ratios. That said, if you trade individual stocks frequently, Fidelity's $7.95/trade is on the lower end.

Keep early exit fees in-mind. I'm focusing on buy-and-hold here, but if for any reason you need to sell a commission-free ETF early, both Fidelity and TD Ameritrade charge early exit fees if you sell within 30 days of purchase ($7.95 and $19.99 respectively). Schwab and Vanguard do not.

Honorable mention: TradeKing (now the 6th largest broker in the U.S.) doesn't offer any commission-free choices, but their flat commission rate is $4.95/trade. If you trade a lot of individual equities or can't be limited to the fund families offered by the four big boys above, the low flat-rate might make sense for you. They're also fantastic if you occasionally trade options.

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