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For nearly a year now, a war has been waging among discount brokers. Yet although TD AMERITRADE (Nasdaq: AMTD ) was slow to get into the game, it's fired what could be the winning shot in the latest battle over commission-free ETFs.
Going for the tag-team
Up until now, the broker ETF wars were all about strategic alliances. Charles Schwab (NYSE: SCHW ) started by reducing its commissions and offering Schwab-branded ETFs at no commission to customers. Fidelity responded with a commission cut of its own, as well as a partnership with BlackRock's (NYSE: BLK ) iShares to offer 25 iShares ETFs commission-free. Not to be outdone, Vanguard followed suit by offering its full lineup of proprietary ETFs at no commission.
That left TD AMERITRADE and fellow competitor E*TRADE Financial (Nasdaq: ETFC ) and Scottrade among the odd brokers out. It was easy to speculate that one of them might arrange a partnership with major ETF provider State Street (NYSE: STT ) , which also remained on the sidelines in the broker wars.
But TD AMERITRADE's move is much bigger than that. Rather than limiting itself to a particular ETF issuer, TD AMERITRADE has chosen to offer 101 ETFs at no commission. And the most innovative thing about TD Ameritrade's deal is that the ETFs come from all over the provider universe.
Who you can get
The problem with previous commission-free arrangements: You had to cast your lot with one particular ETF provider. If you wanted free ETF trading from multiple fund companies, you had to open up multiple brokerage accounts.
Not so with TD AMERITRADE. It offers major funds from iShares, State Street's SPDRs, Vanguard ETFs, as well as offerings from Invesco's PowerShares, Barclays (NYSE: BCS ) , WisdomTree, and Deutsche Bank (NYSE: DB ) . Surprisingly, the selection of iShares is far more comprehensive than Fidelity's list, with country-specific ETFs being the notable addition to TD AMERITRADE's offering list.
Now, with more than 100 ETFs at your disposal, a single TD AMERITRADE account can take the place of multiple accounts elsewhere. The innovation seems obvious, yet while it's easy to understand why Vanguard stuck with its own extensive lineup of ETFs, it's surprising that neither Schwab nor Fidelity came up with the idea in the first place.
Not for everyone
Perhaps the most interesting thing about the move, though, is that TD AMERITRADE is taking strong steps to discourage active investors from taking advantage of the deal. Investors who sell ETF shares that they bought commission-free before holding them at least 30 days will have to pay a short-term trading fee of almost $20.
That may stem from the nature of the deal. According to the New York Times, TD AMERITRADE isn't getting any incentives from the ETF companies whose funds it offers. That left the broker free to choose whatever ETFs it wanted to, but it also means that TD AMERITRADE has decided to be solely responsible for the costs of offering commission-free ETFs.
Obviously, TD AMERITRADE believes that offering a comprehensive lineup of commission-free ETFs will both keep its existing customers from being tempted to move their accounts elsewhere, and potentially attract a new set of customers looking for low-cost ways to establish a long-term investing portfolio. By limiting the offering to non-traders, the broker can also protect the revenue it earns from the segment of its customers who trade more frequently.
What's good for TD AMERITRADE, though, is bad news for those left without an ETF deal. The ball is squarely in the court of Scottrade, E*TRADE, and every other broker that hopes to cater to ETF investors. TD AMERITRADE's deal has shown that a broker may not need to partner up with an ETF provider to deliver exactly what customers want. Whether competing brokers will be willing to step up to the plate is another thing entirely. It'll be interesting to see who fires the next shot in the broker wars.
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