Allan S. Roth, CFP, CPA, president of Wealth Logic, LLC, a financial advisory firm in Colorado Springs. He is author of How a Second Grader Beats Wall Street: Golden Rules Any Investor Can Learn. DareToBeDull.com
Investment firms have been slashing the management fees that they charge investors for some exchange-traded funds (ETFs)—lowering the amounts to near nothing in some cases. The firms are doing so to attract cost-conscious investors who have been shifting from expensive, actively managed mutual funds to less costly, passively managed ETFs.
In recent months, BlackRock Inc., the largest asset manager in the world, cut the fee on its popular iShares Core S&P Total US Stock Market ETF (ITOT) by more than half to 0.03% per year, which the Schwab US Broad Market ETF (SCHB) then quickly matched. Vanguard charges 0.05% for the Vanguard Total Stock Market ETF (VTI). In comparison, the average fee charged by ETFs is 0.44%, and the average charged by traditional index mutual funds is 0.74%.
However, low management fees don’t necessarily bring the lowest overall costs. For example, discount brokerages often charge $7 to $10 per transaction to buy and sell certain ETF shares, although that is sometimes waived. In comparison, discount brokerages often charge no commission or transaction fees on certain index mutual funds, although that varies, and fees on outside mutual funds can range up to $50 or more. If you trade often, the transaction fees could negate the advantage of low ETF costs.
Some brokerage firms do offer commission-free trades for certain ETFs. If you have a brokerage account at Vanguard or Schwab, you can trade house-brand ETFs without commissions. Fidelity offers commission-free trading on most major iShares ETFs. Be aware that brokerages often use low-cost ETFs as loss leaders to attract investors who might then also invest in more expensive products.