Ask a Fool: Are Commission-Free ETFs a Good Deal?

Be sure to check the fine print.

Matthew Frankel, CFP
Matthew Frankel, CFP
Jun 21, 2019 at 12:00PM
Investment Planning

Q: My broker offers a hundred or so commission-free ETFs. This seems like a good deal -- should I limit my search to these?

Your broker's commission-free ETFs could be a good deal.

One problem is that the ETFs offered on a commission-free basis are often not the ETFs with the lowest expense ratios. Now, this isn't a universal truth, so it could require a bit of comparison shopping to find the best deal.

Consider this example. Let's say that you want to invest $10,000 in a S&P 500 index fund. Your broker offers a commission-free version with a 0.25% expense ratio. Meanwhile, to buy a lower-cost one like the Vanguard S&P 500 ETF (NYSEMKT:VOO), which has a 0.04% expense ratio, you'll need to pay a commission.

Well, assuming the S&P 500 averages 9% annualized returns, over the next 20 years, that seemingly small 21-basis-point difference in expense ratios would rob you of more than $1,800 in investment gains. After 30 years, the difference is a mind-blowing $6,550. Does that seem worthwhile to save a $7 trading commission?

The bottom line is that paying literally hundreds or thousands of dollars in additional fees over the years isn't worth saving a trading commission for a long-term investor. If a commission-free ETF offered by your broker is among the cheapest in its class in terms of expense ratio, go for it. If the ongoing fees are even a few basis points higher, a long-term investor is almost always better off paying the small up-front trading commission.