Most unintended consequences are a bad thing.
But sometimes, unintended consequences are good. Case in point: Exchange-traded funds that trade on commission-free platforms have lower bid/ask spreads than those that trade with commissions.
A study by Lara Crigger on ETF.com found that ETFs sold without trading commissions showed higher average trading volumes than those sold with commissions. She looked at funds that traded in five traditionally illiquid markets: emerging market bonds, emerging market equities, U.S. small-cap equities, municipal bonds and U.S. real estate. Leveraged and inverse funds were excluded.
In all five categories, the difference in mean volume was large indeed: $240.97 million for real estate funds that traded commission-free, for example, vs. $10.93 million for those that traded with commission.
And in all five categories, the bid/asked spread was dramatically lower for funds that traded commission-free. In real estate funds that traded for commission, for example, the mean bid/asked spread was 0.26%, vs. 0.07% for those that traded commission-free. For emerging markets bond funds, the mean spread for funds that trade with a commission was 0.80%, vs. 0.14% for those that don't trade with commission.
“Furthermore, it also appears that no-fee funds tend to accrue greater assets than ETFs carrying commissions,” Ms. Crigger writes. “The average assets under management (AUM) for the 51 no-fee ETFs in our sample set was $3.87 billion, while the average AUM for the 102 commission-only ETFs was just $477 million.”
Should advisers care? “Yes, even if you're more of a buy-and-hold investor than a trader,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA. “If the spread is three or five cents a trade, that offsets a three- or five-cent expense ratio savings. Advisers should be conscious of the spread and not just aim for the cheapest or most frequently traded ETF.”
Be aware, however, that no-fee platforms are, to some extent, a marketing tool. Some very large (and low-cost) ETFs trade with commission, and some ETFs of modest assets are on the no-fee platofrms. Just because you save money on a trade doesn't mean you should sacrifice cost for your client's asset allocation, Mr. Rosenbluth said. “You should look for the best combination of costs and exposure.”