4 Tips for Cashing in on Commission Free ETF Trades
October 11, 2010
SAN DIEGO (ETFguide.com) – The ongoing price war among brokerage and investment firms for ETF assets is a positive development for individual investors everywhere. It’s ushered in a new era of lower investment costs for both active traders along with buy-and-hold investors.
Here are four tips to help you cash-in:
Spread out Your Purchases
One of the long-held arguments against ETFs versus mutual funds is that dollar cost averaging with ETFs isn’t a feasible choice because the high cost of brokerage commissions get in the way. While that argument used to be true, commission free ETF trading has now made dollar-cost averaging affordable and viable.
Dollar cost averaging aims to lower the cost basis of your investments by making periodic investments at various times instead of one big purchase. Also, reverse dollar-cost average can work for investors with large ETF positions. Instead of selling your entire investment all at once, spreading out the sale over a few days, weeks or months may fetch you a better price.
No-Load doesn’t mean No Cost
Investors accustomed to buying no-load index mutual funds might want to consider upgrading to ETFs. Why? Because depending on your brokerage firm it may cost you more money to buy or sell no-load mutual funds than ETFs.
Even among online discount brokers with vast fund supermarkets, the transactions charges for no-load mutual funds can be anywhere from $15 and higher. This makes commission free ETF trades look even better. Remember: Transaction costs will vary so check your brokerage platform.
Be Smart on Your ETF Order Entry
The invention of commission free ETF trades does not mean you should ignore the importance of placing the right type of orders. This fact is well illustrated by the May 6th “Flash Crash” which highlighted the problems for sellers who entered market orders. Because of the sharp selloff on that fateful day, sellers who placed market orders got caught with executed trades at prices well below what they were expecting.
Use limit orders to protect yourself. More times than not a limit order just a few cents away from the bid/ask spread will get your ETF order filled at your desired price.
Self-Discipline Still Required
Even with zero commission costs, trading in and out of ETFs is rarely a good idea. Many short-term trades are not profitable and those that are are taxed at the higher short-term capital gains rate versus the lower-rate for long-term gains.
In the end, buying and holding onto a good investment is still a better strategy versus buying and selling it ten or twenty times throughout the day.
In summary, zero brokerage cost ETF trades are great but not without limits. For example, TD Ameritrade’s latest commission free offer on 100 pre-selected ETFs only applies if customers hold the respective funds longer than 30 calendar days otherwise the standard commission rate of $9.99 will apply.
People should also consider the other additional costs of doing business with a particular brokerage firm. What about the fees they charge on other products and services they have? How do they compare to peers?
Finally, most commission free ETF trading only applies to plain vanilla index ETFs or proprietary ETFs. Missing from the list are specialized funds that focus on currencies, commodities and leveraged long and short ETFs. Could this become the next frontier for commission free ETF offers? Stay tuned.