5 Top Commission-Free ETFs at Charles Schwab in 2018

As the cost of making a trade plummets, many brokers are offering commission-free ETF trades, enabling their customers to avoid commissions when they buy or sell certain ETFs. Given that Charles Schwab (SCHW 0.59%) charges a standard commission of $4.95 for online trades, investors who use its list of more than 200 commission-free ETFs can save a lot of money on transaction fees.

I looked through Charles Schwab's list of commission-free ETFs and found five funds that are perfect for a long-term portfolio like an individual retirement account (IRA). Here are my five favorite commission-free ETFs at Schwab, and the case for each fund.

Data source: Charles Schwab.

1. Schwab U.S. Large-Cap ETF

The case for this large-cap ETF is simple: It seeks to track the performance of the Dow Jones U.S. Large-Cap Total Stock Market Index, which is an index that includes the 750 largest companies on exchanges in the United States.

Investors who buy this commission-free ETF thus get immediate exposure to a portfolio of the largest and most important companies on American exchanges at a very low cost. About 91% of the fund overlaps with the S&P 500, so its performance should roughly approximate S&P 500 index funds over time, though it obviously won't track the S&P 500 perfectly. 

The ETF's annual expense ratio of 0.03% ranks it among one of the cheapest exchange-traded funds on Earth -- seriously. Large-cap stocks make up the vast majority of the total value of the stock market, so this fund alone captures the majority of stocks by market value. 

Image source: Getty Images.

2. SPDR Portfolio Mid Cap ETF

Don't be fooled by the name. This ETF is as much of a small-cap ETF as it is a mid-cap ETF. This ETF tracks the S&P 1000 Index, which is made up of 400 mid-cap stocks in the MidCap 400 index, and 600 stocks from the SmallCap 600 index.

The net result is that investors who buy this fund effectively get broad exposure to small and midsize companies in one commission-free ETF. This fund pairs well with the large-cap ETF, as a mix of the two funds covers the vast majority of investable companies on U.S. exchanges.

Data source: Morningstar.

Depending on how you mix these two funds, you can get more or less exposure to companies of all sizes. A 50-50 portfolio of these two ETFs would result in 40% U.S. large caps, 31% mid caps, and 29% small caps, for example. Though they have overlapping holdings, the amount is modest (roughly 3% of the funds' assets, according to ETF Research Center), making them a good combination for building a diverse portfolio of U.S. stocks.

3. Schwab International Equity ETF

Going international is a good way to get exposure to foreign economies and currencies with the goal of earning uncorrelated returns. This ETF tracks the FTSE Developed ex US Index, which is an index of large and mid-cap stocks that operate in 23 developed markets excluding the United States, according to its prospectus.

This ETF is most exposed to stocks in large developed markets including Japan, the United Kingdom, and France, which make up 21%, 16%, and 9% of assets, respectively. Top holdings include Nestle, Samsung, and HSBC, which you won't find in U.S.-focused funds.

The fund's low expense ratio makes this an attractive way to invest overseas. At a cost of 0.06% per year, this commission-free ETF is one of the lowest-cost international funds on the market.

4. Schwab Emerging Markets Equity ETF

Emerging markets offer unique risks and the opportunity to put capital to work in markets where stocks trade at lower prices relative to their earnings. The ETF tracks the FTSE Emerging Index, which includes roughly 1,000 companies in 23 emerging-market economies around the world. Importantly, this fund has no holdings that are also in the aforementioned international ETF.

Like many emerging-market ETFs, this fund has a bias toward Asian economies, as China, Taiwan, and India make up 29%, 14%, and 12% of assets, respectively. The only downside is that it doesn't venture into small-cap territory, investing in large and mid caps only. Those looking for inexpensive exposure to small-cap stocks in emerging markets may have to look beyond Schwab's commission-free list.

5. Schwab U.S. Aggregate Bond ETF

There are many reasons to like aggregate bond funds: They're simple, they're diversified, and they offer exposure to an asset class that should zig when your stocks zag. This commission-free ETF is no different from most, offering a diversified portfolio of bonds with the goal of tracking the Bloomberg Barclays U.S. Aggregate Bond Index.

Think of this as a "total bond market" ETF for high-quality, investment-grade bonds. Its portfolio is largely invested in super-safe triple-A bonds (74% of the portfolio), so it should produce returns that are less correlated to the ups and downs of the stock market.

The ETF's underlying bond portfolio has an average yield to maturity of 2.5%, a good proxy for the income it will produce for its investors. Given an expense ratio of 0.04%, fund fees won't eat into returns in any meaningful way, either. 

How to use commission-free ETFs like a pro

Buying and selling exchange-traded funds requires a little more attention than buying or selling mutual funds. Mutual funds are traded after the market closes at the net asset value of the fund, but ETFs are traded during market hours like stocks. At times, ETFs can trade at small premiums or discounts to the underlying value of their assets. Premiums or discounts are generally more common among ETFs that trade hands less frequently. 

When buying or selling ETFs that have lower daily trading volume, it's smart to use limit orders to buy or sell. A limit order tells your broker to only buy or sell a stock or ETF at a certain price, in contrast to a market order, which is filled immediately at the prevailing price. Using a limit order is a good way to make sure you don't overpay for the ETF, and thus whittle away some of the advantage of investing in low-fee, commission-free ETFs in the first place.

But don't take this mean that ETFs -- particularly commission-free ETFs -- are a bad way to invest. Over the long haul, you can improve your returns by minimizing the costs of investing by using funds that carry low fees and no commissions, features of all five ETFs we've discussed here.