In a world plagued by high-cost investments and shady financial intermediaries, there is one emerging trend that investors can rejoice in: the mad rush to cut trading commissions on exchange-traded funds. In fact, the moves that major market players are making today are likely to have far-reaching effects on the ETF industry for years to come.
Can’t cut fast enough
Discount broker Charles Schwab
As investment firms see their profit margins from traditional ETFs slowly whittled away, this line of business will likely become profitable for only the largest of ETF providers, which are able to reach a critical mass of assets. I’m guessing that actively managed ETFs will become the next big area of growth in this sector as firms look to market new products. I’m still not sold on the necessity or even the long-term viability of actively managed ETFs, so I’d recommend sticking to passively managed exchange-traded funds for now.
How to benefit
There’s no reason you can’t profit right now from the latest move in the ETF commission-cutting game. If you’re one of the many investors who has a Vanguard brokerage account, make sure you’ve got at least one or two of the fund shop’s ETFs in your portfolio.
For all-encompassing market exposure, the Vanguard Total Stock Market ETF
If you’re looking to fill out the international side of your portfolio, consider the Vanguard FTSE All-World ex-U.S. ETF
Too much of a good thing?
In general, all of this ETF fee-cutting is a good thing for investors. I always like it when Joe and Jane Investor can get cheaper access to the stock market. Just make sure you don’t use free commissions as a free license to start day trading ETFs. Remember, these are tools for gaining broad, cheap access to wide segments of the market, not vehicles for short-term speculation.
You should still take a long-term approach to ETF investing. So pick the funds you need based on your targeted asset allocation and stay invested for the long run.
Lastly, as a general rule when it comes to ETF investing, remember that simplicity is the key to success. Stick to basic, broad-market funds that offer wide coverage rather than narrowly focused investments that invest in a single country or industry. Those types of ETFs are typically much more expensive and riskier than their broader counterparts.
And whatever you do, stay away from leveraged, and inverse leveraged, funds. Rational investors don’t need to take leveraged bets on the direction of the stock market.
Ultimately, investors should be very happy about the trend of free commissions for so many exchange-traded funds. It makes investing in the stock market much less expensive and is likely to add further pressure to brokerages to continue lowering trading commissions for all types of investments. If you have a brokerage account that allows commission-free trading, make sure you’re taking advantage by owning at least a few solid ETFs.
Check to see if your portfolio is light on any particular asset class, and if so, think about beefing up that exposure with a low-cost ETF. It could be one of the best things you’ve done for your portfolio in a long time.