Vanguard latest to drop commissions on ETFs

Move comes months after competitors Charles Schwab & Co. and Fidelity Investments separately eliminated commissions on certain ETFs
JUN 24, 2010
Vanguard has become the latest mutual fund company to offer investors commission-free trades on its exchange-traded funds. The Vanguard Group Inc.'s move comes just months after competitors Charles Schwab & Co. and Fidelity Investments separately eliminated commissions for online trades for certain ETFs. Unlike those companies, however, Vanguard's new deal will apply to all trades of such funds. Until now, Vanguard investors have paid up to $45 per trade on an ETF, depending on the investment amount and the channel used to make the trade. Vanguard executives made the decision to eliminate the commissions after the company recently brought all of its clearing, settlement, custody, reporting and regulatory responsibilities for its brokerage business in-house, explained spokeswoman Linda Wolohan. “In addition, we have experienced more than $280 billion in cash flow over the past three years,” she said. “The combination of growth and efficiencies resulting from self-clearing led to considerable cost savings and has enabled us to make our commission schedule more attractive to clients.” Last November, Schwab announced that it would make its suite of proprietary ETF funds available online without commissions. In February, Fidelity dropped the commission for online trades for 25 of BlackRock Inc.'s iShares ETFs. Offering commission-free ETFs makes sense for Vanguard, given its status as a low-cost, no-load mutual fund shop, said Paul Justice, a research analyst at Morningstar Inc. “You may now see some mutual fund investors move to ETFs for the tax advantages,” he said. “But since Vanguard's ETFs are just another share class of its mutual funds, they still get the assets in to their products.” But some worry that by offering ETF trades commission-free, Vanguard may end up raising the total operating expenses of its ETFs to make up for the cost. “There is no such thing as a free lunch,” said Dave Nadig, director of research at IndexUniverse.com. “It doesn't mean they can magically offer ETFs at no cost; it just means that there is a cost, and they are choosing to absorb that.” The move won't require Vanguard to raise expense ratios on its ETFs, said Rebecca Katz, a spokeswoman. “Importantly, we have found that clients who own brokerage accounts retain larger mutual fund accounts with Vanguard, and their assets are ‘stickier,' which should help generate further economies of scale to push fund expense ratios lower,” she said.

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