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E*TRADE's Sale Will End the Broker Wars

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Ever since the financial crisis ended, it's been a dog-eat-dog world in the broker industry. Now, it looks like one major player might actually consent to getting eaten up by one of its competitors -- and depending on who ponies up to grab the opportunity, you and millions of other investors could see the impact on how you trade stocks, funds, and other investments.

This baby's all grown up
Yes, the broker on the chopping block is E*TRADE Financial (Nasdaq: ETFC  ) , purveyor of the popular E*TRADE baby commercials. After facing huge pressure from the hedge fund Citadel, which with a nearly 10% stake is E*TRADE's largest investor, to find a potential merger partner, the company hired Morgan Stanley late last week in order to explore various strategic alternatives.

As my fellow Fool contributor Rick Munarriz pointed out last week, a downturn in trading activity has hurt not only E*TRADE but also rivals TD AMERITRADE (Nasdaq: AMTD  ) and Schwab (NYSE: SCHW  ) . With Schwab in the process of gobbling up optionsXpress (Nasdaq: OXPS  ) , TD seems like the logical acquisition choice, and the company met yesterday to discuss its strategy toward E*TRADE.

Why it matters to you
From a shareholder's standpoint, what happens to E*TRADE could make a big difference. But for E*TRADE's brokerage customers, a combination could greatly enhance their ability to take advantage of a big trend that they've thus far been shut out of: the proliferation of commission-free ETF trading.

If you use E*TRADE as your broker, then you might have no idea how the rest of the industry has shaken itself up over the past year and a half. But in late 2009, Schwab made an innovative move to try to make a late entry into the ETF space, offering its own proprietary ETFs to its customers without having to pay a commission to buy or sell them.

Since then, nearly every major broker other than E*TRADE has come out with similar programs of their own. Like Schwab, Vanguard opened up its more extensive line of ETFs for free customer consumption. Scottrade bought a fund subsidiary to offer its ETF line. Fidelity and TD AMERITRADE, among several others, chose to use outside ETFs, with Fidelity tapping BlackRock's (NYSE: BLK  ) iShares line while TD went with a smorgasbord of different providers' ETFs.

An E*TRADE/TD combination would give E*TRADE customers access to the most comprehensive free ETF program in the business, with TD's 100-plus list of available ETFs for trading. That's great news for anyone at E*TRADE who wants to include ETFs as part of their overall investing strategy.

The fall of SPDRs?
But what's good news for E*TRADE investors may be bad news for the lone major ETF provider left without a partner in the free-ETF dance. State Street (NYSE: STT  ) , the company behind the SPDR line of ETFs, has some of its funds included in TD's free ETF lineup, but it doesn't have a dedicated agreement with a particular broker like its main competitors BlackRock and Vanguard do.

For a while, I've argued that an E*TRADE/State Street partnership made perfect sense. The move would have helped excuse E*TRADE for being late to the free-ETF game, and it would have given State Street a viable way to save face rather than letting itself get singled out from a major source of potential assets.

But if E*TRADE disappears, then so, too, will State Street's last chance to make a big splash getting into the broker wars. Despite the popularity of some SPDR products, not having an exclusive partnership to offer ETFs could cost the company its position near the top of the biggest ETF managers.

Keep your eyes open
Obviously, what happens in the coming weeks and months could change the picture in the broker wars substantially. For now, though, customers should be excited about the prospects of finally getting in on a valuable investing tool that its rivals have enjoyed for a long time.

If your broker hasn't given you the ETF choices you want, maybe you need another broker. Check out the competition here. And to learn more about ETFs and what they can do for your portfolio, be sure to grab the Fool's special free report, "3 ETFs Set to Soar During the Recovery." Just click on the link to get started.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.

Fool contributor Dan Caplinger won't miss those dumb baby commercials. He doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of BlackRock, optionsXpress, and Schwab. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy makes money, not war.

Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 27, 2011, at 4:05 PM, prginww wrote:

    Although it seems logical, that there are not too many buyers for E-Trade, and even if "TD seems like the logical acquisition choice", I think that AMTD would not be very clever to by E-Trade now, or at all.

    Just wait for the customers to come.

    Do you choose your broker just for the ETFs that are offered?

    A fair part of E-Trade clients will probably move to AMTD anyway.

  • Report this Comment On July 31, 2011, at 12:41 AM, prginww wrote:

    I have no connection with Scottrade except being a customer who has never had a problem with this privately-owned broker.

    There are a lot of cliches about how public ownership often ruins companies. Perhaps they are often true. Doesn't help those of us who are owners of publicly traded companies, does it.

    Our economic system is in a world of hurt and it is going to be even more painful next week.

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