Vanguard Joins Crowd Offering Commission-Free ETF Trades

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May 04, 2010
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Vanguard, the pioneer of putting-the-customer-first, low-cost funds, has joined a number of competitors by offering commission-free trades to its brokerage customers using its ETFs.

Vanguard, the money management firm whose name is synonymous with low-cost products, raised the stakes on competitors by offering its brokerage customers commission-free trading on all 46 of its ETFs, joining the list of ETF providers that offer a way for investor to purchase funds free of charge.

Late last year, Charles Schwab became the first ETF provider to offer investors a way to trade ETFs commission-free when it launched its new family of ETFs. The no-commissions deal applies only to Schwab’s own brokerage customers. The move was seen as a way for Schwab to differentiate its new ETFs from competing existing products at firms such as iShares, Vanguard and others.

Competitors have clearly viewed Schwab’s gambit as a legitimate threat. Just a few months after Schwab made its announcement, the world’s biggest ETF firm, iShares, signed an agreement with Fidelity to offer Fidelity customers the chance to trade 25 iShares funds commission-free. Other deals have been rumored.

The Vanguard announcement is a big deal because it pairs commission-free trading with some of the lowest-cost and most well-established ETFs in the market. Also, by covering all 46 Vanguard ETFs, it’s now the largest group of ETFs available for commission-free trading. The question now, which Dave Nadig takes up in his blog today, is whether Vanguard’s move will raise costs, because processing trades does cost money.

Vanguard addressed that very question in a prepared statement, saying, to begin with, that bringing its brokerage operations in-house last year has saved it “tens of millions of dollars,” and that it’s now simply passing those savings back to clients.

Dollar-Cost Averaging

One of the historical issues with ETFs is they are hard to use for dollar-cost averaging, because unlike mutual funds, you must pay a commission each time you buy or sell an ETF. By waiving commissions, brokerages like Schwab, Fidelity and now Vanguard are making dollar-cost averaging in ETFs possible.

“To be clear, our commission-free offer is not intended to encourage the active trading of ETFs, which we believe is counterproductive and rarely successful. Rather, it enables investors to construct a balanced, long-term portfolio of low-cost Vanguard ETFs and add to the portfolio regularly," Vanguard Chief Executive Officer Bill McNabb said in the initial statement the company released announcing the new program.

The Malvern, Pa.-based company’s brokerage unit is overshadowed by its mutual fund complex, but Vanguard has long had a major brokerage operation.

“Importantly, we have found that clients who own brokerage accounts retain larger mutual fund accounts with Vanguard, and their assets are ‘stickier,’ which should help generate further economies of scale to push fund expense ratios lower,” Vanguard said in the second statement it released responding to the possibility that commission-free trades could raise costs.

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