7 of the Best Commission-Free ETFs at TD Ameritrade in 2018

TD Ameritrade recently revamped its list of ETFs that its clients can buy and sell without paying a commission. The list runs the gamut from simple and inexpensive stock index funds to so-called "smart beta" ETFs that attempt to beat the market with rules-based stock picking methodologies.

I sorted through the TD Ameritrade's commission-free ETF list and found seven index ETFs that would make for good buy-and-hold investments in an individual retirement account (IRA) or health savings account (HSA). Here are my seven favorite commission-free ETFs at TD Ameritrade, complete with the case for each fund below.

Data sources: TD Ameritrade, SPDRs.com.

SPDR Portfolio Total Stock Market ETF

This fund is a really good way to get exposure to most stocks on domestic exchanges that are incorporated or headquartered in the United States. This total stock market ETF tracks the SSGA Total Stock Market index, which generally includes companies that have a minimum market cap of $100 million.

Like all total stock market ETFs, this one fund gives you a lot of diversification, as it currently holds about 2,800 stocks. However, note that its holdings are weighted by market cap, so the three largest stocks (Apple, Microsoft, and Amazon) make up roughly 7.6% of the portfolio combined.

This fund is best compared to ETFs that track the Russell 3000 index, as well as other total stock market ETFs like Vanguard's popular total stock market fund. A low expense ratio of just 0.03% makes this fund a cheap way to invest in a very diversified portfolio of U.S. stocks.

Image source: Getty Images.

SPDR Portfolio Small Cap ETF

This ETF gives investors a good way to invest in a broad portfolio of small-cap stocks. The fund tracks the SSGA Small Cap Index, which includes companies that together add up to only 10% of the stock market's value. (Most of the stock market's value comes from small a number of really large companies. The 500 companies in the S&P 500 make up about 80% of all stock market value in the United States.)

With nearly 2,100 holdings, this market-cap weighted index is roughly comparable to the Russell 2000, which is generally regarded as the small-cap index. Note that because it only includes companies with a minimum market capitalization of $100 million, this SPDR ETF has slightly less exposure (27.5% of the fund) to micro-caps compared to the Russell 2000 index (31.6% of the index), according to Morningstar data. The Russell 2000 has a minimum market cap of $30 million, so it ventures further into micro-cap territory than other small-cap indexes.

SPDR Portfolio Mid Cap ETF

Though it carries the "mid cap" label, this fund isn't a true mid-cap ETF. It tracks the S&P 1000 index, which includes companies in S&P's MidCap 400 and SmallCap 600 indexes. Therefore, it tilts further into smaller stocks, as the average company in the index has a market cap of $3.75 billion compared to the Russell Mid Cap Index's average of $12.6 billion, based on Morningstar data. 

With this in mind, investors who use this fund to get mid-cap stock exposure may want to dial down their investments in other small-cap funds, or use this fund as a way to get mid-cap and small-cap exposure in portfolio.

The table below compares the allocations of the total stock market, mid-cap, and small-cap ETFs in this article by market cap. Note that the total stock market ETF is more of a large-cap fund, while the small-cap fund obviously tilts more toward smaller companies. This mid-cap fund roughly fills the void between the largest and smallest stock ETFs.

Data source: Morningstar.com.

SPDR Portfolio World ex-US ETF

This fund is a fine fit for people looking for international stock exposure. It tracks the S&P Developed Ex-U.S. BMI index, which is includes roughly 1,600 stocks all around the world. Major country exposures include Japan, United Kingdom, and France at roughly 23%, 15%, and 8% of the fund, respectively.

International stocks doesn't mean unrecognizable companies. The fund's three largest holdings (Nestle S.A., Samsung Electronics, and Novartis) are companies with which most investors have some familiarity. Because this fund is market-cap weighted, it invests the most in the largest companies. The weighted average market cap of its holdings was $44.6 billion, putting it well into large-cap territory.

This fund is best compared to Vanguard FTSE Developed Markets ETF, which offers similar country-level exposure at a low cost, and was previously on TD Ameritrade's commission-free ETF list.

SPDR Portfolio Emerging Markets ETF

When it comes to emerging markets, the SPDR Portfolio Emerging Markets ETF is a low-cost, diversified fund that offers exposure to more than 1,200 stocks that are listed and incorporated in emerging market economies. The largest country exposures are China, Taiwan, and India at 33%, 14%, and 12% of the portfolio, respectively.

Its market-cap weighting mechanism give this fund a bias toward large Chinese stocks including Tencent and Alibaba, which together make up more than 9% of the portfolio. South African media company Naspers rounds out the list of its top three holdings. 

This fund is most closely comparable to Schwab Emerging Markets Equity ETF and Vanguard FTSE Emerging Markets ETF. The latter fund was previously on TD Ameritrade's list of commission-free ETFs prior to the changes made in 2017.

SPDR Portfolio Aggregate Bond ETF

This fund generally seeks to track the performance of the Bloomberg Barclays U.S. Aggregate Bond index, a bond index for high-quality government and corporate bonds. This fund acts as a good one-stop shop for bond exposure, as it roughly matches the composition of the bond market.

Bonds rated AAA make up roughly 70% of assets, but the fund boasts a yield of approximately 3%, due to the fact it invests in bonds with an effective duration of six years. As a result, this bond fund has some interest rate exposure, as a 1% increase or decrease in rates will result in a 6% decrease or increase in the fund's value, calculated by multiplying the interest rate change in percentage points by its effective duration.

The premise for investing in this ETF is simple: It gives you broad exposure to a mix of super-safe bonds at an extraordinarily low price of just 0.04% per year, making it a good "set it and forget it" bond ETF. 

SPDR Portfolio S&P 500 High Dividend ETF

Investors who want to add a little yield to their stock portfolio should take a look at this ETF. The ETF tracks the S&P 500 High Dividend index, which includes the 80 highest-yielding stocks in the S&P 500. All holdings are equally weighted, so all stocks make up 1.25% of the fund when it is rebalanced twice per year in January and July.

Note that because this fund selects stocks based on yield alone, it has a natural bias toward real estate investment trusts (REITs) and utilities, which make up approximately 22% and 19% of the fund, respectively. This sector composition results in an ETF that yields more than twice as much as S&P 500 ETFs (3.8% vs. 1.8%). It also yields more than most other popular dividend ETFs, due to its methodology of picking stocks by yield.

Using ETFs the smart way

Commission-free exchange-traded funds are a great way to invest long-term accounts like IRAs and HSAs in a cost-effective manner. But investors should be careful when placing trades. Many of the ETFs on this list are relatively thinly traded, as only a few thousand shares may trade hands on a given day.

Investors who use these funds in their portfolios should be sure to buy or sell shares with limit orders rather than market orders, to ensure that their transaction goes through at a reasonable price. (Market orders are used to buy a stock or ETF immediately at the prevailing price, and such orders could result in overpaying for thinly traded ETFs.)

That said, a combination of no commissions and low expense ratios makes these seven funds attractive for investors who plan to use TD Ameritrade to set up a long-term buy-and-hold portfolio in 2018.