Pros and Cons of TD Ameritrade's New Commission-Free ETFs

by: Gary Gordon

The custodian for the overwhelming majority of my client assets under management is TD Ameritrade (NASDAQ:AMTD). So there are few ETF advocates as happy as I am about free trades on vehicles from the Big 3: iShares, Vanguard, State Street. (Note: There are a few ETFs from PowerShares, VanEck and WisdomTree, but they are noticeably small in number.)

In truth, the platform is a win-win for almost any investor type. For instance, if you’re a buy-n-holder… shame on you! Okay, let me rephrase that. If you’re a buy-n-holder, there are enough choices to construct a well-balanced, stock-bond portfolio across different regions with different styles and company sizes.

Here’s one reasonable example for the leave-it-alone investor: Perhaps you’ve been told that a moderate growth and income investor should have 65% in equities and 35% allocated to income. You want to cover the essentials and you’re not looking for anything fancy.

Buy-N-Hold Commission-Free Bliss?!?!
Allocation %
iShares Inflation Protected (NYSEARCA:TIP) 5.0%
iShares Barclays 1-3 Credit Bond (NYSEARCA:CSJ) 5.0%
iShares Barclays Intermediate Credit Bond (NYSEARCA:CIU) 7.5%
SPDR DB Int’l Inflation Protected (NYSEARCA:WIP) 5.0%
PowerShares Emerging Sovereign Debt (NYSEARCA:PCY) 5.0%
SPDR Barclay Capital High Yield Bond (NYSEARCA:JNK) 7.5%
iShares S&P 500 Index (NYSEARCA:IVV) 10.0%
Vanguard Mid-Cap (NYSEARCA:VO) 7.5%
iShares Russell 2000 (NYSEARCA:IWM) 7.5%
Vanguard FTSE All World ex US (NYSEARCA:VEU) 7.5%
Vanguard Emerging Markets (NYSEARCA:VWO) 7.5%
SPDR S&P Emerging Small Cap (NYSEARCA:EWX) 7.5%
Vanguard Reit (NYSEARCA:VNQ) 5.0%
iPath DJ Commodity Index (NYSEARCA:DJP) 5.0%
Vanguard Europe (NYSEARCA:VGK) 7.5%
Click to enlarge

It may not be perfect, but it’s 15 positions that’ll cost you ”zipski” to trade. So at this point… portfolio size no longer matters.

Now, anyone who has followed me for any length of time understands that I NEVER buy-n-hold. Yet would this portfolio work as a “target” for those who are more active? Perhaps… and here’s why:

Prior to TD Am’s new commission-free platform, it cost $8.95 to buy and $8.95 to sell. The round-trip for $17.90 has been modified to $0 if you hold a position for at least 30 days. Even investment advisers like myself… we’re not looking to day trade. We manage risk and use stop-losses… and the vast majority of positions will be held for more than the allotted 30 days. So one can target a sensible allocation without too much concern about having to experience a short-term redemption fee.

Oh… but what if you do trade within the 30-day window? The penalty is a mere $19.99… or just $2.09 more than it cost to trade round-trip just last week!

So that’s the good news on TD AM… and it is indeed good stuff. However, smart investors shouldn’t get so wrapped up in the investments that are commission-free, that they neglect to compare the risks and rewards of comparable ETFs not included in the commission-free program.

1. Currencies and Commodities. Many investors want gold or silver or both. Well, you’re not going to get it trade-free. Neither the SPDR Gold Trust (NYSEARCA:GLD) nor the iShares Gold Fund (NYSEARCA:IAU) are offered. And while there are several total commodity index trackers to consider, the world of precious metals has carved out a separate niche of inflation/currency devaluation protection. Don’t restrict yourself from considering precious metals.

There are two ”currency funds” in the commission-free line-up — Barclays JEMS Note (NYSEARCA:JEM) and iPath Currency Carry ETN (NYSEARCA:ICI). However, the hidden fees associated with wide bid-ask spreads is palpable, and neither of these are funds; rather, they are debt obligations. ICI isn’t even a pure currency hedge, as it is a strategic carry trade fund.

More important for some folks would have been access to a CurrencyShares vehicle for widely traded currencies like the yen (NYSEARCA:FXY), euro (NYSEARCA:FXE) or franc (NYSEARCA:FXF). Many emerging market investors like the freedom of WisdomTree Real (NYSEARCA:BZF) and WsidomTree Rupee (NYSEARCA:ICN).

2. Alternative Income ETFs. Some of the best performing ETFs in 2010 have come from the higher-yielding world of preferred stock, convertible bonds, master limited partnerships, emerging market bonds and high-yield bonds. Investors in iShares Preferred (NYSEARCA:PFF), SPDR Convertibles (NYSEARCA:CWB), JP Morgan Alerian MLP (NYSEARCA:AMJ), iShares High Yield (NYSEARCA:HYG) and JP Morgan Emerging Market Debt (NYSEARCA:EMB) have had nothing but sun shining on their portfolios.

In contrast, TD AM’s program only has SPDR High Yield (JNK) and PowerShares Sovereign Debt (PCY). Not that there’s anything wrong with that. But if memory serves… the iShares IBoxx High Yield (HYG) has more issues which lessens the impact of default and… HYG’s credit quality is slightly better. In the end, though… JNK has had a higher yield payout.

The point here is… don’t be afraid to purchase outside the commission-free zone. If you think PowerShares Sovereign Debt (PCY) is more risky than JP MorgaEmerging Markets (EMB)… buy the latter. If you think WisdomTree Emerging Small Cap Earnings (NYSEARCA:DGS) has better fundamentals than TD’s chosen SPDR Emerging Small Cap (EWX), pony up the $8.95 trading fee for DGS. Sometimes, it is better to pay a small trading charge.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.