Yet when E*TRADE said last month that it had chosen to stay independent, I said there was one thing it needed to do to stay competitive in the industry: make a partnership with an exchange-traded fund provider to offer commission-free ETFs to its customers. And now, E*TRADE has announced plans to do just that -- and it has put together an impressive lineup of ETFs in its new commission-free program.
Below, I'll reveal why E*TRADE's new ETF offerings vault it back into contention among the industry's top brokers. But first, let's review how E*TRADE got so far behind -- and what its competitors have already done.
Two years late?
The whole idea of commission-free ETF trading started two years ago, when Schwab
Next, other brokers got on board. Vanguard already had an extensive lineup of ETFs, so it was simple to open them up to brokerage customers at no charge. Scottrade chose to offer Morningstar-based index ETFs from its FocusShares affiliate, while Interactive Brokers
So what was left for E*TRADE? That's where I got it wrong: State Street
Instead, E*TRADE went with three separate providers to put together a menu of more than 90 ETFs. WisdomTree has built a strong reputation in the industry for certain innovations, including its fundamental-weighted index ETFs that track metrics such as earnings and dividends rather than market cap. It also has started focusing on international investments, offering foreign-aimed ETFs like WisdomTree Emerging Markets Equity
In addition, E*TRADE has added funds from Global X, which had also made a deal with Interactive Brokers. Global X's funds let investors drill down on individual sectors, countries, and investing strategies. For instance, its Global X Lithium ETF
Finally, the broker is also using 10 ETFs from Deutsche Bank's db-X. They include five target-date funds and five international equity ETFs.
Will it help?
Clearly, despite offering a wide array of ETFs, E*TRADE chose not to tap into the raw asset play that State Street would have brought. To me, that suggests that State Street simply isn't interested in partnering with a discount broker -- raising the possibility that it may try to offer its ETFs directly at some later point, although it may merely be trying not to alienate any of its institutional clients who might chafe at State Street singling out any one institution over another.
E*TRADE clearly had to make a move to be competitive in the ETF world, and this represents a strong step. While lacking the sheer diversity of TD AMERITRADE's ETF smorgasbord, E*TRADE did a good job of bringing together ETFs that will help its customers build diverse and eclectic portfolios. Given how late the company was to the party, E*TRADE did pretty well.
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