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Are Trade Fee Free ETFs Game Changers?

June 24th, 2010

“There’s a price war raging among exchange-traded funds, and no matter who wins, your portfolio can benefit. In recent months Fidelity, Vanguard, and Charles Schwab have eliminated commissions on some or all of their own funds, which removes a key obstacle for investors. Schwab recently upped the ante by lowering the expense ratio on six ETFs.” Writes MoneyWatch

“The commissions you once had to pay to buy or sell these low-cost, tax-efficient funds have long been the prime downside to ETFs, especially for investors investing regularly in small amounts. Now with these three big brokerages offering free trades on dozens of ETFs, that drawback has been lifted. But just because you can invest for free that doesn’t mean you should.” Writes MoneyWatch

“Before the Fidelity, Schwab, and Vanguard shift, every time you bought shares of an ETF, your brokerage would typically charge a $2 to $9 trading fee — a cost you can usually avoid with a mutual fund. If you were investing, say, $100 every two weeks, that $9 transaction fee would make an ETF much more expensive than a comparable index mutual fund — wiping out any cost advantage the ETF had. So the free trades are a clear win for investors who dollar-cost average, or for anyone who has just a small sum to put into a fund.” Writes MoneyWatch

“Rick Ferri, author and chief executive of Portfolio Solutions, a financial planning firm that invests about 70 percent of clients’ assets in ETFs, hopes the free trades and the attendant focus on ETFs draw more investors to index investing. ETFs can give you exposure to both broad swaths of the market, as well as narrower segments of the market that you think will outperform. “If I think financials are undervalued, why wouldn’t I buy them all?” says Morningstar’s Burns. “Why take on the idiosyncratic risk of one particular company?” Writes MoneyWatch

For the full MoneyWatch Story click: HERE



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