The Simple Strategy for Free ETFs

For nearly a year and a half, discount brokers have waged war against each other, offering successively larger and more impressive ways for investors to use exchange-traded funds at no commission to put together the perfect portfolio. Yet one relatively unknown broker entered the fray yesterday with an appealing reminder that the primary reason people use ETFs is for simplicity -- and that the best way to keep things simple is to offer customers exactly what they want, no more, no less.

Keep it simple
Firstrade may not be the best-known broker in the business, but it came up with an extremely elegant solution in coming up with a free-ETF package for its customers. Rather than seeking to one-up its competitors, Firstrade made a modest package of 10 ETFs available to customers at no commission, mostly consisting of low-cost ETFs from Vanguard and iShares.

You might think that 10 ETFs wouldn't be enough to put together a reasonable portfolio. But the Firstrade offerings cover nearly the entire gamut of investing, ranging from Vanguard Dividend Appreciation (NYSE: VIG  ) and iShares S&P 500 for U.S. stocks, to Vanguard MSCI Emerging Markets (NYSE: VWO  ) on the emerging-market stock side and the commodity ETF PowerShares DB Commodity Index (NYSE: DBC  ) . Combined with three bond funds, Firstrade makes it possible to establish a pretty customized asset allocation strategy with this small set of essential tools.

The only way to go
Given its alternatives, Firstrade made what I see as an excellent decision not to try to participate in the one-upmanship that its more illustrious competitors have done since late 2009. Although Schwab (NYSE: SCHW  ) kept things relatively simple with its own proprietary line of ETFs, most small discount brokers wouldn't be in a position to launch their own ETFs successfully. On the other hand, as Fidelity, Vanguard, and TD Ameritrade (Nasdaq: AMTD  ) successively opened up increasing numbers of ETFs to customers -- TD Ameritrade came in at more than 100 ETFs -- it's clear that no one's likely to be able to eclipse that mark. More recently, Scottrade chose to go the proprietary ETF route with funds tracking different indexes from the ones most other ETFs use.

At the same time, Firstrade also did well to avoid compartmentalizing itself. Interactive Brokers (Nasdaq: IBKR  ) played to its frequent-trading base by making levered ETFs available to clients at no cost, but that only cemented the reputation it already had in attracting traders. Firstrade, on the other hand, has established itself as a mainstream broker for everyday investors. And by focusing on keeping things simple, Firstrade should attract a decent amount of attention from potential customers who may never have heard of the company before.

Still waiting
In addition to boosting its own name recognition, Firstrade may have given clues to how one of the last remaining major holdouts in the ETF price wars, E*TRADE Financial (Nasdaq: ETFC  ) , may choose to join the fray in the future. Rather than meeting its main competitors in a head-to-head deathmatch competition, E*TRADE may well decide that simplicity also appeals to its customers as well and choose a path that closely resembles what Firstrade has done here. That would leave ETF provider State Street still mostly observing from the sidelines as iShares and Vanguard find traction across several brokerage platforms.

For investors, Firstrade's move only underscores just how cutthroat the competition is to get you to trust your money to the discount broker of your choice. With increasing incentives designed to lure you, you're in the driver's seat in picking the best broker for your particular needs. Although free ETFs are only one piece of the puzzle to consider when choosing a discount broker, they can certainly help you put together a simple yet comprehensive portfolio -- so take advantage of these offers while the time is ripe.

If you haven't found the right broker yet, a good place to start your search is the Fool's Broker Center. It includes plenty of information on several promising brokers that will get you started in the right direction. Don't wait; click here now and take the first step toward improving your investing.

Fool contributor Dan Caplinger likes both free and simple. He owns shares of Vanguard Dividend Appreciation, Vanguard MSCI Emerging Markets, and iShares S&P 500 ETFs. Interactive Brokers and Schwab are Motley Fool Stock Advisor choices. The Fool owns shares of Interactive Brokers and Vanguard MSCI Emerging Markets ETF. 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 is your simple key to prosperity.


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