There is an ETFs fee war going on.
It started recently. This war is between ETF providers. As investor, I already enjoy reduced trading fees and watch what else is going to happen, because this war is not over yet.
Vanguard has recently eliminated trading fees on almost all of their ETFs and some of it's rivals (more than 1800 of approximately 2000 ETFs available in the market, leveraged ETFs are excluded). Etrade offers more than 250 commission free ETFs, TD Ameritade - more than 300. Charles Schwab has over 200 commission-free ETFs and Fidelity has over 90.
The new progress in this war is the $0 expense ratio Fidelity products FXROX and FZILX (which are mutual funds and not ETFs). Of course competitors will response to that.
It is very possible that the $0 expense ratio may also soon come to the ETFs.
But how the banks make their money with a completely expense-free and trading fee-free product?
The banks are fighting for the investor's money, so there must be some other ways than fees to get the revenue form a "free" product.
ETFs are low cost investments but they generate significant profits for the banks. The scale matters and the more money is invested, the more revenue the bank will make.
There are three main ways for the bank to generate revenue from an ETF/mutual fund:
1. Management fees (expense ratio).
2. Dividend enhancements by reducing the amount of international taxes by having bank presence in other countries.
3.Securities lending. Legally ETFs and mutual funds can lend out up to 50% of their unlevered assets for interest. The usual borrowers are short sellers.
So even if the ETFs will go completely fee-free for the investor (no trading fees and no expense ratio) the bank will still generate substantial revenue with the other two methods. The scale matters and that will make the fee war continue.
Investors already had some benefits from the fee war:
1. The trading fees are reduced among many brokers, not just for ETFs but also for stocks and options.
2. The low expense ratios are offered for many ETFs with many brokers (0.03% for SCHB is low considering 0.17% for SPY, I am still waiting for a low expense ratio ETF equivalent for QQQ).
3. $0 expense ratio are starting to appear and they may become more frequent.
So what is the major factor in choosing a bank or a broker firm while the fee war still continues?
Some of the major participants in the fee war are Vaguard, TD Ameritrade, Etrade, Schwab and Fidelity. Another (somewhat different) participant is Merill Lynch.
I don't use Vanguard yet. I have accounts with Etrade, Schwab, Fidelity and Meryl Lynch. Most frequently I use Etrade and Schwab. But I only started to use Schwab after they lowered the trading fees for stocks from $7.95 to $4.95. I used their $0 trading fees ETFs before that.
Fidelity has restrictions on their own ETFs - the Fidelity own ETFs have to be held in the account for at least 30 days. That is too restrictive for me. Schwab's own ETFs don't have such restrictions.
Merill Lynch is interesting in another way. The trading fees are $6.95 per trade, but once you have $50,000 - $100,000 in assets (averaging over three month time), you have 30 free ETF and stock trades per month. And once you have above $100,000 in assets, you have 100 free trades per month. Options are not included.
I was looking forward to use so many free trades, but I discovered a very important (for me) issue - their unrealized gains web page is not updating real time after a trade was done and the value updates only after several days. Customer support representative told me that the updates happen after the trade has cleared and that is after 2 days. That is too long for me. I found a way to go trough the recent orders page which gives a real time quote per position but it is too cumbersome. My use of Merill Lynch will be limited for longer term trades until they fix that.
In summary:
1. The fee war continues.
2. We know the banks can go lower because they have other ways to produce the revenue from ETFs.
3. The fees will stay low overall but are still the major factor in deciding which bank to choose. The comparison of trading fees and expense ratios will still stay the major factor. Per recent Schwab ETF survey, 45% of millennial and 39% of Generation X investors say they will move their account to a firm that offered commission free options. As a Gen Xer I agree. I don't like fees.
8/22/18
Update:
Just 6 days after I posted this article, the news came out that in September J.P. Morgan Chase is planning to start a service "You Invest" with free trades. That will include 100 free trades in the first year and continuing 100 free trades per year for balances above $15,000 and unlimited free trades for balances above $250,000.
I will check it out and if they will have real time updates, I might replace my inflexible Merill Lynch account with this new option.
I also hope that Etrade and Schwab will join and offer free trades too.
