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How This Broker Can Succeed Now

Dan Caplinger
November 11, 2011

When E*TRADE Financial (Nasdaq: ETFC  ) announced earlier this year that it was putting itself up for sale in response to pressure from investors, it looked like it might end a long-standing battle among the country's leading discount brokers. But now that E*TRADE is apparently off the chopping block, there's one move the broker with a spokesbaby needs to make right now to assert its status as an independent force in the industry: Establish a partnership to bring its customers commission-free exchange-traded funds from the biggest remaining ETF provider that hasn't paired off with a rival brokerage company.

Reigniting the broker wars
Back in July, it didn't look like E*TRADE would still be an independent entity by now. With hedge fund Citadel as a near-10% shareholder demanding that the company find a potential merger partner, it looked as though the broker would fulfill the long-held expectations of many shareholders and marry itself off to rival TD AMERITRADE (Nasdaq: AMTD  ) .

But yesterday, E*TRADE said that after its strategic review, it would best serve investors by remaining independent. Shareholders weren't happy about the move -- shares traded down nearly 5% after-hours following the announcement.

In order to thrive going forward, E*TRADE needs to get itself back in the game. And right now, there's no better way to jump on the bandwagon than for it to finally enter the broker wars and offer its customers a wide selection of ETFs at no commission.

Come on -- everyone's doing it!
The thing is that E*TRADE is one of the only brokers left that isn't giving its customers free access to ETFs. Schwab (NYSE: SCHW  ) started the trend two years ago by creating its own line of proprietary ETFs to make available to customers. Vanguard followed suit by opening its already-thriving ETF line to brokerage customers, and Fidelity paired up with iShares manager BlackRock (NYSE: BLK  ) to offer a sampling of 25 iShares ETFs to its customers, later expanding its menu to 30.

Slowly but surely, other players fell into line, emphasizing their own particular strengths. Scottrade launched FocusShares ETFs based on indexes from Morningstar (Nasdaq: MORN  ) . Firstrade chose a select group of 10 ETFs that customers could use to build a simple asset-allocation-based portfolio. Interactive Brokers (Nasdaq: IBKR