Morningstar's Guide To Free ETF Trading

by: Morningstar

By Timothy Strauts

We look for the best of the bunch among commission-free trading programs for exchange-traded funds.

Today, almost every major discount broker offers a commission-free trading program for exchange-traded funds. Brokerages are competing for investor accounts, and they are leveraging ETFs' popularity to lure investors. This competition among brokers has helped to reduce the cost of investing in ETFs. This article will highlight the pros and cons of the commission-free ETF trading programs offered by Fidelity, TD Ameritrade (NASDAQ:AMTD), Charles Schwab (NYSE:SCHW), E*Trade (NASDAQ:ETFC), Vanguard, and Merrill Lynch.

Unpacking the Total Cost of ETF Ownership

Before we get to the broker breakdown, it's important to remember that commissions aren't the only costs investors face when buying and selling ETFs. There are other implicit transaction costs to consider. For example, investors also should assess bid/ask spreads before buying and selling shares of an ETF. As a general rule of thumb, ETFs with large asset bases and high trading volumes generally will have lower bid/ask spreads than smaller ETFs with lower trading volumes.

Holding costs also must be considered. The most explicit cost of holding an ETF is its expense ratio. But much as is the case with trading costs, there are implicit costs to consider as well. Morningstar's estimated holding cost measure for ETFs provides a holistic assessment of both the explicit and implicit costs of owning an ETF. The implicit costs of ETF ownership include items like transaction costs, sampling error, and share-lending revenue. You can find an ETF's estimated holding cost at the bottom of the "Performance" tab on the fund's quote page on our website.

Breaking Down the Brokers

Picking a suitable brokerage service involves assessing a whole host of factors beyond commission-free ETF trades. These items include the trading tools on offer, the level of customer service, and whether or not access to research is offered. For the purposes of this analysis, we will ignore those aspects and focus solely on comparing the attributes of these platforms' commission-free ETF trading programs. In the tables below, you'll find several data points that summarize the key aspects of each broker's program. Most of the data is self-explanatory, but a few data points warrant further explanation.

The "Number of Morningstar Categories Covered" field provides a sense of the diversity of the selection of ETFs eligible for commission-free trades. Ideally, this list will cover a large number of Morningstar's 93 ETF categories in order to offer the broadest possible opportunity set and enable the construction of well-diversified portfolios. Also, while commission-free trades are great, they are quite a bit less so if the only options at your disposal are high-cost funds. The "Average Asset-Weighted Expense Ratio" data point shows the average asset-weighted fee being paid by investors in the ETFs on the list. Lastly, we rarely recommend investing in ETFs with less than $100 million in assets. These funds tend to be fairly illiquid and face a higher degree of closure risk than funds with an asset base greater than $100 million. Highlighting the percentage of eligible funds below the $100 million threshold provides a rough gauge of the quality of the funds within the program.


In March of this year, Fidelity renewed and expanded its partnership with iShares. As part of the agreement, Fidelity beefed up the lineup of iShares ETFs available for commission-free trading to 65 from 30. The centerpiece of the lineup is the Core series of ETFs, a group of 10 funds meant to offer very competitive expense ratios and broad diversification for long-term investors. The rest of the list includes almost all of iShares' most popular funds. iShares MSCI Emerging Markets Index (NYSEARCA:EEM), which has more than $40 billion in assets, is the only glaring omission from the iShares family. However, iShares Core MSCI Emerging Markets (NYSEARCA:IEMG) with its rock-bottom 0.18% expense ratio is a suitable alternative. Every major Morningstar category is represented on the list, and the average asset-weighted expense ratio of just 0.25% is very competitive.

Fidelity is currently planning to build its own family of ETFs. It can be assumed that any ETFs the firm launches will be part of the commission-free trading program.

(Click to enlarge)

TD Ameritrade

TD Ameritrade's ETF list was constructed by Morningstar Associates, which is a subsidiary of Morningstar Inc. Morningstar Inc. also provides an ETF screener, data, and research and commentary for TD Ameritrade's platform. The lineup includes ETFs from eight different ETF providers and is very diverse. The average ETF on the TD Ameritrade platform has assets under management of $5.9 billion. Investors seeking commodity exposure will notice PowerShares DB Commodity Index (NYSEARCA:DBC) on the list. Commodity ETFs are only available in the TD Ameritrade and Charles Schwab programs. Two notable ETFs missing from the list, however, are SPDR S&P 500 (NYSEARCA:SPY) and SPDR Gold Shares (NYSEARCA:GLD). Investors interested in S&P 500 exposure can get access through iShares Core S&P 500 (NYSEARCA:IVV), which did make the cut. The average asset-weighted expense ratio of ETFs on the list is only 0.20%, which ranks second among the programs covered here.

(Click to enlarge)

Charles Schwab

Charles Schwab's program was originally limited to Schwab's own ETFs, but in February of this year, the firm opened the program up to include four additional ETF providers. Schwab ETFs are some of the lowest-cost in the industry and cover all of the major stock and bond sectors. A very inexpensive and globally diversified portfolio could be constructed using Schwab ETFs exclusively. The program covers a large number of Morningstar categories, but 33% of the ETFs have less than $100 million in assets, and the average asset-weighted expense ratio of the lineup is above average at 0.37%. The Schwab platform may be the most appealing to active traders, as it is the only program with no trading restrictions.

(Click to enlarge)


E*Trade's program offers a competitive number of ETFs, but it doesn't include any funds from the four largest ETF providers. As a result, more than 63% of the ETFs on the list have less than $100 million in assets, and their average asset-weighted expense ratio is very high at 0.53%. A broadly diversified portfolio can be created from the list, but it will have an above-average expense ratio. E*Trade's program holds the most appeal for investors who believe strongly in WisdomTree's dividend- and earnings-weighting approaches to index construction.

(Click to enlarge)


Vanguard has the only program to exclusively offer proprietary ETFs. Vanguard's stable of ETFs includes some of the largest, cheapest, and most liquid funds on the market. Broadly diversified portfolios can be created at a very low cost using only Vanguard ETFs; the average asset-weighted expense ratio of these ETFs is just 0.12%. Also, the program's short-term trading restrictions are fairly lenient. Even many active traders could limit themselves to less than 25 buy and sell orders in the same ETF over a 12-month period. While the Vanguard program only covers 35 Morningstar categories, every major category is represented in the ETF lineup.

(Click to enlarge)

Merrill Lynch

Merrill Edge is a relatively new low-cost brokerage platform that is trying to attract customers by offering commission-free trading on all ETFs for investors who maintain a $25,000 cash balance in a Merrill brokerage account or in a Bank of America bank account. This program probably will work best for those who already have or are willing to open bank accounts with Bank of America. If you can meet the required cash-balance requirements, this program is very compelling. A limit of 30 trades a month is enough to satisfy the moderately active trader, and the flexibility to invest in any ETF is a big advantage. If this sounds as though it is too good to last, that's because it might not. Wells Fargo had offered a similar free program that it recently stopped offering to new customers. There's no guarantee that the Merrill program will not see a similar rollback at some point in the future.

(Click to enlarge)

Disclosure: Morningstar, Inc. licenses its indexes to institutions for a variety of reasons, including the creation of investment products and the benchmarking of existing products. When licensing indexes for the creation or benchmarking of investment products, Morningstar receives fees that are mainly based on fund assets under management. As of Sept. 30, 2012, AlphaPro Management, BlackRock Asset Management, First Asset, First Trust, Invesco, Merrill Lynch, Northern Trust, Nuveen, and Van Eck license one or more Morningstar indexes for this purpose. These investment products are not sponsored, issued, marketed, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in any investment product based on or benchmarked against a Morningstar index.