Commission-Free ETFs

Daniel Penzing
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Charles Schwab

The most highly traded securities in the world are the stocks of publicly traded companies. However, there are a number of unique alternative volatility instruments, including Exchange Traded Funds (ETFs). There are more than 1,000 ETFs for individual investors to choose from, and the number is growing every day.

Since the public offering of the first ETF in 1993, ETFs have experienced explosive growth. Conceptually, the idea of an ETF is an innovative one – combining two of the most commonly traded financial instruments, the stock and the option. The stock of the underlying companies serve as an index while the option serves as a safety net for the investor.

ETFs work much like any other stock, but they also have the additional feature of defining their market price through contract. Different ETFs track different indexes, but there are also inverse ETFs that track the opposite value of another index.

ETFs allow investors to invest in a basket of stocks with a simple stock purchase, as opposed to buying a single stock. ETFs expose investors to a variety of sectors and asset classes, which cuts down portfolio risk and makes for a more balanced and diversified portfolio.

E*TRADE Commission-Free ETFs

Fidelity Free ETFs

One of the biggest selling points of ETFs is that you can purchase them commission-free or with no transaction fees.

But not all ETFs are made equal.

The traditional commission-free ETF is a popular write style that can be quite pricey because you are buying shares of the fund from your brokerage.

With the traditional commission-free ETF, you are buying the fund either outright or through a dollar-weighted average share price.

You are not buying the underlying securities of the ETF because you are not picking what goes into the index.

This means you are not diversified in that particular sector, which could be a problem if you are looking for a sector-based position. This structure also makes it difficult to predict the performance by looking at the ETF’s holdings alone.

This type of commission-free ETF is best used by investors who want sector exposure, which can be good choices for young investors with a long time horizon and who are not saving a lot of money.

If you’re looking for a better commission-free ETF, which is an index fund that mirrors the performance of an index, then you want to look at securities-based ETFs.

These types of commission-free ETFs let you choose what goes into the index.

Interactive Brokers

Group has made the concept of commission-free exchange-traded funds (ETFs) a reality.

ETFs usually charge a commission that is proportional with the size of the trade and therefore cancel out their slight trading advantages. The commission for most European ETFs is 0.25 percent, while many North American products are commission free. Interactive Brokers Group, however, has devised a plan that makes large-volume ETF trading completely commission free.

TD Ameritrade Commission-Free ETFs

Now that interest rates are no longer at zero, the yield on the 10-year Treasury bond has finally fallen to its historical average. And that’s a good thing. The problem is that long-term rates have started to head lower again … and on Monday hit a new all-time low.

So one of the hottest investments on the market are iShares Barclays Intermediate U.S. Treasury ETF (NYSEArca: IEI), iShares Barclays 7-10 Year Treasury Bond ETF (NYSEArca: TLT) and ProShares Ultra 20+ Year Treasury (NYSEArca: UBT).

IEI and TLT have had solid runs in 2013. In fact, TLT has returned 15% after falling 14% in 2012, while IEI has moved ahead 14% to start 2013 after a 13% decline in 2012. UBT has been a market leader, returning nearly 25% in 2013.

The iShares ETFs are enabling investors to take short-term exposure to Treasury bonds with UBT offering exposure to long-term bonds.

TD Ameritrade quickly jumped on the bandwagon and announced that it will waive its trading commission for these ETFs so that investors can trade them commission-free for a year.

Vanguard

Vanguard is one of the largest issuers of ETFs in the United States and has some of the most admired funds in the industry. As part of the largest mutual fund provider in the world, Vanguard has the power to keep fees low and to diversify in ways that others simply can’t. While the company’s focus on low-fee funds can cause them to lag behind some rivals in market-capitalization weighted indexes, it also means that they can offer a low-cost alternative in specialized markets — like business bank loans and foreign currency ETFs.