The golden investing rule of controlling fees to generate bigger returns never makes more sense than it does at challenging times like these for financial markets.
So, cost-conscious investors, take note of the introduction of commission-free ETF trading at online brokerage Scotia iTrade. There may not be a cheaper way to invest anywhere.
Scotia iTrade now allows clients to buy or sell 46 different ETFs online without paying the firm's usual fees of $19.99 for accounts of less than $50,000 and $9.99 for larger ones. Other online brokerages charge between $5 and $29 for online orders of ETFs, which typically are index-tracking funds that trade like a stock.
There are blessedly few rules and restrictions on iTrade's commission-free ETF program. You have to hold for 24 hours to have commissions waived, but that's just to keep day traders away. There's no minimum account size required, and there are no limits on how many cost-free trades you can make.
The commission-free ETFs on iTrade's list includes smart choices such as the Claymore 1-5 Year Laddered Government Bond ETF , which is just the portfolio insurance you need at uncertain times like these for investing. The cost of this ETF is 0.17 per cent, which compares to between 0.90 and 1.96 per cent for the biggest bond mutual funds.
The commission-free list also includes the Horizons S&P/TSX 60 Index ETF , which tracks the country's biggest blue chip stocks and costs just about 0.08 per cent to own.
The iTrade commission-free list is big enough to allow you to build a full portfolio, but don't be fooled into thinking it's a collection of the best ETFs out there because it's not.
The firm offers commission-free trades on 31 ETFs from Claymore Investments, eight from the iShares family and seven from Horizons ETFs. That's a bit strange, given that iShares has over two-thirds of all ETF assets in Canada. Claymore is a strong, savvy competitor with the No. 2 ranking in assets, but it doesn't quite compute that its products are so dominant at iTrade.
Here's the deal. Claymore is paying for part of the marketing for the commission-free ETF program, and it's supplying educational content for iTrade's website. That's the context for iTrade offering commission-free trading for the Claymore Oil Sands Sector ETF instead of the more diversified, more heavily traded and cheaper iShares S&P/TSX Capped Energy Index Fund .
The same might be said about iTrade offering the Claymore Advantaged Canadian Bond Index ETF , a broad-based bond fund tuned specially for non-registered accounts, instead of the marginally cheaper and more transparently constructed iShares DEX Universe Canadian Bond Index Fund or BMO Aggregate Bond Index ETF .
The iTrade offer of commission-free ETF trading is a milestone in making low-cost investing more accessible – let's be clear on that. Even the people behind the iShares ETF family had good things to say about it.
"It's great news for online self-directed investors," said Mary Anne Wiley, iShares managing director. "These types of arrangements are going to make it even more appealing for them to use ETFs in their portfolios."
But investors shouldn't assume that just because a brokerage is offering an ETF with no buy or sell commissions, it's automatically a good choice. In addition to checking the cost of buying an ETF, you should look at:
*Ownership costs: As measured by the management expense ratio.
*The index being tracked: How diversified and widely followed is it?
*Tracking error: The closer an ETF's returns are to index performance minus fees, the better.
*Liquidity: You want active daily trading on a consistent basis, not an orphan that goes untraded for days at a time or generates volumes of a few hundred shares.
In the online brokerage business, aggressive moves to cut price by one firm tend to be matched over time. Qtrade Investor said on Wednesday said it will meet or beat the Scotia deal with a zero-commission ETF program to be announced in the weeks ahead. BMO InvestorLine said it plans to offer periodic promotions for fee-free ETF trading, while CIBC Investor's Edge, RBC Direct Investing and TD Waterhouse all indicated they had nothing imminent.
Meanwhile, Scotia iTrade has given the growing number of investors using ETFs a reason to choose it rather than the competition.
Scotia iTrade chief Bob Grant said ETFs account for just 5 per cent of client accounts at the firm, but they're the fastest growth asset by far. Asked what improvements they wanted from iTrade in a recent survey, clients zeroed in on ETFs.
"They asked for more information about ETFs, more tools and more cost-effective ways to buy them," Mr. Grant said.
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How to buy index investments for free
1. Commission-free ETFs
Online broker Scotia iTrade now offers commission-free trading of 46 exchange-traded funds.
2. Claymore Investments' PAC Plan
Under this pre-authorized cash contribution plan, investors pay a commission to buy an initial position in Claymore ETFs and then arrange to make regular subsequent investments at no additional cost. Check with your brokerage firm to see if it's enrolled.
3. Bank index funds
Costs to own these funds vary, but all are sold on a no-load basis. The best deal is TD's e-series, which you must buy online via TD Asset Management or TD Waterhouse online brokerage.
Rob Carrick