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TD Ameritrade (Ticker: AMTD) just announced that it offers 100+ commission free ETFs for its clients.The 100+ (a precise number is 101) ETFs were selected by Morningstar that include ETFs from iShares, Vanguard, State Street, PowerShares, and others. In comparison, Schwab's free ETFs include only 11 of its own funds. Similarly, Vanguard offers 47 Vanguard ETFs for free. Fidelity was the first one that offers 25 iShares ETFs for free. See the official TD Ameritrade offering for more details.

We view this as a very significant step for small investors (well we are not sure whether TD Ameritrade would still offer such a deal to very large accounts). We have constructed an investment plan TD Ameritrade Commission Free ETFs to take advantage of these ETFs. Though for the trades of these ETFs to be eligible for commission free, TD Ameritrade's customers have to hold these ETFs for more than 30 days, such a restriction is not significant for our plan since the plan only rebalances at most once per month. In this plan, the minimum holding period for each fund is set to be 1 month, which is equivalent to 30 days.

TD Ameritrade Commission Free ETFs's 401K plan consists of 101 funds. These funds enable participants to gain exposure to 6 major assets: Emerging Market Equity , Foreign Equity , Fixed Income , US Equity , Commodity , REITs . We view this is the most comprehensive coverage of major asset classes.

The list of minor asset classes covered are:

  • COMMODITIES BROAD BASKET: GSG, DBC
  • Conservative Allocation: AOK
  • DIVERSIFIED EMERGING MKTS: EEM, GMM, PXH, DEM, SCHE
  • Emerging Markets Bond: PCY
  • EQUITY: VTI,VT
  • EUROPE STOCK: IEV, VGK, PEF, DEB
  • Foreign Large Blend: EFA, VEU, GWL, PFA
  • Foreign Large Growth: EFG
  • Foreign Large Value: EFV, PID, DWM
  • FOREIGN SMALL/MID GROWTH: IFSM, VSS, SCHC
  • Foreign Small/Mid Value: SCZ
  • Global Real Estate: IFGL, RWX
  • High Yield Bond: HYG, JNK, PHB
  • Inflation-Protected Bond: TIP
  • Intermediate Government: IEI, VGIT, ITE
  • Intermediate-Term Bond: AGG, CIU, BIV, BND
  • JAPAN STOCK: EWJ, JPP, PJO, DXJ
  • LARGE BLEND: IVV, IYY, IWV, VTI, VV, SPY, DLN, RSP, SCHX
  • LARGE GROWTH: IVW, IWZ, JKE, VUG, ELG, QQQQ, RPG, SCHG
  • LARGE VALUE: IVE, IWW, JKF, VTV, ELV, PWV, RPV, SCHV
  • Latin America Stock: ILF, GML
  • LONG GOVERNMENT: TLT, TLH, IEF, EDV, VGLT, TLO, PLW
  • Long-Term Bond: CLY, LQD, BLV, VCLT
  • MID-CAP BLEND: IJH, IWR, JKG, VO, MDY, EMM, PJG, DON, EZM, MVV
  • Mid-Cap Growth: IJK, IWP, VOT, EMG, PWJ, RFG, UKW
  • MID-CAP VALUE: IJJ, IWS, JKI, VOE, EMV, PWP, RFV, UVU
  • Moderate Allocation: AOM
  • Multisector Bond: AGG, GBF, BND, LAG
  • Muni National Interm: ITM
  • Muni National Long: MUB, TFI, PZA , MLN
  • Muni National Short: SUB, SHM, PVI, SMB
  • PACIFIC/ASIA EX-JAPAN STK: EPP, AAXJ, GMF, PAF, DND
  • REAL ESTATE: IYR, ICF, VNQ
  • SHORT GOVERNMENT: SHY, SHY, VGSH, PLK, USY
  • Short-Term Bond: CSJ, BSV, VCSH
  • SMALL BLEND: IJR, IWM, JKJ, VB, DSC, PJM, DES, SAA,UWM, SCHA
  • Small Growth: IJT, IWO, JKK, VBK, DSG, PWT, RZG, UKK
  • SMALL VALUE: IJS, IWN, JKL, VBR, DSV, PWY, RZV, UVT
  • SPECIALTY-REAL ESTATE: RWR, PSR, URE
  • World Allocation: AOR, AOA
  • WORLD BOND: IGOV, BWX, WIP
  • WORLD STOCK: IOO, VT

As of Oct 15, 2010, this plan investment choice is rated as above average based on our Plan Rating methodology that was designed to measure how effective a plan's available investment funds are. It has the following detailed ratings:

Diversification -- Rated as great (97%)
Fund Quality -- Rated as below average (29%)
Portfolio Building -- Rated as great (90%)
Overall Rating: above average (74%)

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA , both provided by MyPlanIQ). For comparison purpose, we also include the moderate model portfolios of a typical five asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:

REITs:(IYR or VNQ or ICF)
Fixed Income:(AGG or BND)
Commodity:(NYSEARCA:DBC)
Foreign Equity:(EFA or VEU)
Emerging Market Equity:(EEM or VWO)
US Equity:(SPY or VTI)

Performance chart (as of Oct 15, 2010)

click to enlarge

Performance table (as of Oct 15, 2010)

Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
TD Ameritrade Commission Free ETFs Tactical Asset Allocation Moderate 13% 87% 13% 86% 20% 128%
TD Ameritrade Commission Free ETFs Strategic Asset Allocation Moderate 10% 85% -1% -6% 9% 47%
Six Core Asset ETFs Tactical Asset Allocation Moderate 10% 65% 9% 66% 17% 114%
Six Core Asset ETFs Strategic Asset Allocation Moderate 11% 84% 2% 9% 9% 42%

To summarize, TD Ameritrade Commission Free ETFs plan is very comprehensive and allows investors to achieve significant performance with reasonable risk. With now all of the top discount brokers (Fidelity, Schwab and TD Ameritrade) offering such commission free ETFs, investors are now free from trading costs and can focus on portfolio building in terms of better asset allocation strategies.

Disclosure: Long IYR, EEM, TLT

Source: TD Ameritrade Commission Free ETFs: Comprehensive Portfolio Building Blocks