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

By Matthew Frankel, CFP® – Jun 21, 2019 at 12:00PM

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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 (VOO 1.09%), 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.

Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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