When you think of cutthroat competition, the discount brokerage market might not seem like the obvious place to look. But recently, price-cutting among brokers has been fast and furious. Yesterday, a familiar name joined the fray -- and its moves will have an impact not just on competing brokers but also on the entire exchange-traded fund (ETF) industry.
Vanguard announced that effective yesterday, it was cutting its brokerage fees across the board. Depending on the size of your account, you'll pay between $2 and $7 per trade, with million-dollar accounts offering 25 free trades per year. Even the smallest accounts will get the first 25 trades for $7, only then rising to $20.
Long known for its low fees, Vanguard's brokerage services division has been slow to entire the competitive discount brokerage market. For years, the company had above-average trading commissions, perhaps to emphasize its reputation favoring a long-term investment philosophy.
But what likely forced Vanguard's hand was Fidelity's arrangement with Blackrock
Vanguard matched that offer, giving brokerage customers free access to trading its own ETFs. In doing so, Vanguard drew the battle lines for what may be the most important fight among major ETF providers.
Already, Vanguard ETFs are in direct competition with iShares products for supremacy in certain sectors of the ETF market. Although State Street
One area where iShares and Vanguard have come into direct conflict is in the emerging markets realm. With $35.5 billion in assets, the iShares MSCI Emerging Markets ETF
Sticking to its principles?
There is one area in which Vanguard is taking a decidedly different tack from other brokers: trading frequency. The new commission schedule includes a provision that says that if you buy and sell a given ETF more than 25 times in 12 months, then you'll be restricted from buying new ETF shares for 60 days. The provision is clearly aimed at extremely frequent traders, since you could still make round-trip buy-sell transactions once every two weeks and still be fine under the guidelines.
Overall, though, the strategy makes sense for Vanguard. It combines the best features of its two competitors' offerings. Like Fidelity, Vanguard is offering free trading of popular, liquid ETFs; but rather than having to go to an outside provider, Vanguard has its own ETFs to make available. And even though Schwab also offers in-house ETFs, they don't have nearly as much in assets as Vanguard, making them less liquid and harder to trade efficiently.
It's clear that Vanguard's move will give more exposure to its ETF lineup, which can only help the company in the long run. The open question, though, is what State Street will do to compete with Vanguard and iShares. With Schwab's die already cast, the SPDR purveyor may have to seek an alliance a broker like TD Ameritrade
For investors, Vanguard's price cuts and free ETFs further expand their ability to invest cheaply. Combined with Vanguard's long-established emphasis on low costs, I think the move is a winner for investors.
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Fool contributor Dan Caplinger always thought the problem with ETFs was commissions for regular investors, so he's psyched about the discount broker price war. He doesn't own shares of the companies mentioned in this article. Charles Schwab is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Vanguard Emerging Market Stock ETF. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy knows how to fight when it has to.