Free ETF Trading at Many Brokerages

EDITOR'S NOTE: This article was originally published in the March 2012 issue of Kiplinger's Retirement Report. To subscribe, click here.

Some investors shun exchange-traded funds because they don't want to pay a commission for each transaction. They may want to take a new look at ETFs. An increasing number of online brokers offer commission-free ETF trading.

But each brokerage firm differs in the types of ETFs it offers free. Charles Schwab and Vanguard Group offer only their own ETFs free. Meanwhile, Fidelity Investments and TD Ameritrade provide commission-free trading in nonproprietary ETFs.

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Don't be blinded by the word free. There may be no transaction costs for certain funds. But the brokerage may carry annual maintenance fees or high commissions for trading other ETFs. Also, the brokerage's free ETFs may carry above-average expense ratios.

If you already use an online broker, check if it offers free ETFs you like. "Having one company that you can trust that has great service makes it easier for you to track your investments and make trades," says Sunit Bhalla, a certified financial planner at OakTree Financial Planning, in Fort Collins, Colo.

If you're looking to cover the entire market, choose a firm that offers broad-based ETFs that track domestic and international stocks and fixed-income investments. It will be easier to rebalance your portfolio because you will not pay transaction fees. You'll also be able to make retirement withdrawals conveniently.

Charles Schwab (www.schwab.com) offers commission-free trading of its own line of ETFs. Although relatively few in number, the Schwab ETFs cover the major bases that an investor might need. In several cases, Schwab's expense ratios come in slightly lower than those of comparable ETFs from Vanguard, traditionally the price leader.

E*Trade (www.etrade.com) offers free trading of 83 ETFs from three providers: WisdomTree, Global X and Deutsche Bank. Most have a niche focus, such as Global X Lithium ETF (symbol LIT), which invests in companies that mine lithium or produce lithium batteries. None offers an all-inclusive domestic stock or international equity ETF, and there's only one fixed-income choice. The selection includes currency ETFs.

Fidelity Investments (www.fidelity.com) has 31 commission-free ETFs. This is a good destination for investors who are looking for broad-based options. All but one are from BlackRock's iShares brand.

Choices include ETFs that track U.S. companies of all sizes. International ETFs cover developed and emerging markets. One of the fixed-income choices tracks the broad Barclays Capital Aggregate Bond Index. You'll pay a commission if you want to fill in some niches, such as energy.

Merrill Edge (www.merrilledge.com) offers free trading of any ETF. Account holders can get up to 30 free trades a month, more than enough activity for the average investor. The catch? You have to maintain a $25,000 cash balance with Merrill Edge or its parent, Bank of America.

Scottrade (www.scottrade.com) began offering commission-free trading of ETFs last year. The 15 Focus portfolios are based on Morningstar indexes.

This is not the go-to site if you're looking for free fixed-income and international stock assets. The brokerage offers free access to four broad domestic equity portfolios, plus 11 U.S. sector ETFs, such as health care.

TD Ameritrade (www.tdameritrade.com) has the most comprehensive list of commission-free ETFs with 101 choices, mostly from iShares and Vanguard. Its broad-based ETFs cover the domestic stock, bond and international equity marketplace. You can also slice narrower, by investing in domestic microcap and dividend ETFs. Besides real estate and commodity ETFs, there are no niche categories, such as technology.

Vanguard Group (www.vanguard.com) offers commission-free trading of its 64 proprietary ETFs, covering a wide range of domestic, international and fixed-income choices. Several ETFs attempt to capture "total" performance of various markets, such as the Total Stock Market ETF, in addition to ETFs covering small-cap, large-cap and other segments of the domestic market.