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Era of Commission-Free ETFs Knocking on Investors' Door?

Sanghamitra Saha

Since the launch of the first ETF almost 26 years ago, the exchange traded fund industry attained great multitude. There are currently about 2,267 exchange traded products listed in the United States, with almost $3.69 trillion in assets under management.

Several strategies have emerged since then, including active management, smart-beta technique, thematic ETFs and many more. Some of these tasted success and but many have failed to attract investors’ attention.

But one attribute that is famous among investors since the beginning is investors’ craving for low expense ratio management (read: Expenses Matter: Dive into 7 Low Cost ETFs).

Inside the Fee Cut Spree

ETF issuers have been trying to make this less-priced investing medium even cheaper. In a bid to gain market share, they are lately engaged in a fee war of late and have been aggressively slashing expense ratios for some of their products.

For a long period of time, the lowest cost corner of the market was dominated by Charles Schwab and Vanguard. But several other issuers are looking for a bigger pie in the ETF market and to that end have cut their fees considerably in recent times. Most of them like BlackRock, Fidelity or State Street have jumped on the bandwagon (read: State Street Intensifies ETF Fee War).

So long, the war was primarily within the asset management space, but industry behemoth Vanguard extended it to the brokerage level in mid-2018. Not only Vanguard, latest actions on this have been strengthened by Fidelity and Schwab (read: Vanguard Action to Make ETF Investing More Affordable).

Inside Schwab and Fidelity’s Latest Move

Both issuers have announced that they will have around 500 ETFs each, even from their competitors like BlackRock, trad free on their platforms. Both players are basically doubling the offering. While Schwab’s commission-free products will be available from Mar 1, Fidelity’s benefit will be accessible from Feb 28.

iShares will join the Schwab platform with 90 funds. There are around 16 providers joining Schwab’s commission-free offerings. On the other hand, Fidelity, which had been in the agreement to offer iShares ETFs without trading fees, is increasing its number of commission-free ETFs to more than 500.

Fidelity’s platform will also offer more choices in the smart beta and active ETF categories from more than 10 asset managers and leading ETF providers in the near term. This comes on top of Fidelity’s existing suite of ETFs that include 10 factor ETFs, three actively-managed bond ETFs, 11 passive equity sector ETFs and Fidelity ONEQ.

Investors’ Benefit

ETFs, which charge as little as $3 a year for every $10,000 invested, have been one of the biggest beneficiaries of that trend, per Wall Street Journal. Part from picking cheaper products, investors are also focused on transaction fees, resulting in a decline in brokerage costs. As a result, ETF investing has been gaining momentum. Assets in U.S. ETFs have ballooned to $3.6 trillion from $793 billion at the end of 2009, according to Morningstar.

How Will Schwab And Fidelity Gain from the Move?

The move seems to be a negative for the companies’ trading revenues. But companies are betting big on new customer acquisition. These customers are likely to “purchase more profitable products and services like cash management or Schwab’s own proprietary funds “, said Richard Repetto, a principal at Sander O’Neill + Partners, quoted on Wall Street Journal.

Asset generations are already hefty. Assets in Schwab ETF OneSource touched $115 billion as of Dec 31, 2018, up 10% year over year. Asset flows into ETFs in the year were $22.8 billion, up 49%, per the issuer.

Against this backdrop, below we highlight some of the commission-free ETFs (from Schwab and Fidelity) available on the market across the providers.

Schwab’s commission-Free Products:

Schwab U.S. Broad Market ETF SCHB; expense ratio 0.3%

Schwab U.S. Large-Cap ETF (SCHX); expense ratio 0.3%

SPDR Portfolio S&P 500 High Dividend ETF (SPYD); expense ratio 0.07%

Xtrackers Russell 1000 Comprehensive Factor ETF (DEUS); expense ratio 0.17%

JPMorgan Diversified Return U.S. Equity ETF (JPUS); expense ratio 0.17%

Invesco S&P 500 Equal Weight ETF (RSP); expense ratio 0.20%

WisdomTree U.S. Quality Dividend Growth Fund (DGRW); expense ratio 0.28%