ETF's with free trades (e.g. iShares): What's the catch?

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ETF's with free trades (e.g. iShares): What's the catch?

Postby jastevenson » Thu Dec 20, 2012 10:21 am

So I've been reading about ETF's lately.

I know mutual funds make their money by charging a management fee.

But ETF's such as iShares charge no trading fee, and there is no management fee.

Which sounds great, but then, how do ETF's make money? "If it's too good to be true it probably is"....so what's the catch?
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Re: ETF's with free trades (e.g. iShares): What's the catch?

Postby DSInvestor » Thu Dec 20, 2012 10:29 am

ETFs have a management fee built in. For example AGG Total Bond Market ETF has an expense ratio of 0.08%.
http://us.ishares.com/product_info/fund ... ew/AGG.htm

Whether there is a brokerage commission for trading iShares ETFs is up to the brokerage firm.
-Fidelity has a deal where 30 iShares ETFs can be traded commission free. https://www.fidelity.com/etfs/ishares

-WellsTrade offers 100 free trades of almost anything in their PMA package.

-Vanguard Brokerage doesn't offer commission free trading for any iShares ETFs unless you get some free trades with Flagship status. Vanguard ETFs are commission free at Vanguard Brokerage.

Depending on where you invest, you should look at your mutual fund options and ETFs. An investor at Vanguard may find that it is easier to just use Vanguard mutual funds. An investor at Fidelity can compare Fidelity Spartan Index funds against iShares ETF. Wiki article link: Fidelity

Wiki article link: ETFs vs Mutual Funds
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Re: ETF's with free trades (e.g. iShares): What's the catch?

Postby Default User BR » Thu Dec 20, 2012 5:05 pm

TD Ameritrade has a commission-free ETF list, which includes many popular Vanguard offerings, but they restrict frequent trading (basically charging the buy and sell commission if you unload too soon).


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Re: ETF's with free trades (e.g. iShares): What's the catch?

Postby jdilla1107 » Thu Dec 20, 2012 7:36 pm

jastevenson wrote:But ETF's such as iShares charge no trading fee, and there is no management fee.


Not sure where you got "no management fee" from. ETFs make their money the same way as mutual funds, by having an exprense ratio.

Maybe you read something that used language like "no active management fee" or something.
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Re: ETF's with free trades (e.g. iShares): What's the catch?

Postby Karamatsu » Thu Dec 20, 2012 8:03 pm

They also seem to skim profits through securities lending plus all the various ways of profiting on the spread, order execution flow, etc. Perhaps the other thing is that passive funds aren't a high-cost business. They don't need analysts poring through annual reports, going to talk with company management, etc. Once they have their algorithm for deciding what mix of stocks to buy, it should be largely mechanical, and once the procedures and structures are decided it seems like a relatively small group of people could easily handle multiple funds. There's tremendous economy of scale, which is undoubtedly why they keep coming out with more, hoping to capture the niches.
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Re: ETF's with free trades (e.g. iShares): What's the catch?

Postby wshang » Thu Dec 20, 2012 9:01 pm

Default User BR wrote:TD Ameritrade has a commission-free ETF list, which includes many popular Vanguard offerings, but they restrict frequent trading (basically charging the buy and sell commission if you unload too soon).Brian

Yeah, be careful if you dividend reinvest. If you sell the entire holdings, you may be within the window and get charged a trading commission. I think this might be a sneaky method TD uses. Best not to dividend re-invest or watch the calendar.
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Re: ETF's with free trades (e.g. iShares): What's the catch?

Postby Angst » Fri Dec 21, 2012 11:53 am

Default User BR wrote:TD Ameritrade has a commission-free ETF list, which includes many popular Vanguard offerings, but they restrict frequent trading (basically charging the buy and sell commission if you unload too soon).

Brian

Here's the list. It's well organized too - you can break it out by fund family or market category.
http://research.tdameritrade.com/grid/public/etfs/commissionfree/commissionfree.asp
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Re: ETF's with free trades (e.g. iShares): What's the catch?

Postby JamesSFO » Fri Dec 21, 2012 12:17 pm

What are the short term trading fees? (not particularly apparent from the website, the link to the fees shows a long list but didn't seem to show trading fees)

EDIT: Nevermind, found it linked 2 deep off the original page, an eye popping $19.99...
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Re: ETF's with free trades (e.g. iShares): What's the catch?

Postby Default User BR » Fri Dec 21, 2012 3:17 pm

JamesSFO wrote:What are the short term trading fees? (not particularly apparent from the website, the link to the fees shows a long list but didn't seem to show trading fees)

EDIT: Nevermind, found it linked 2 deep off the original page, an eye popping $19.99...

As I said, basically the $10 buy and sell commission you'd have been charged if you weren't using the commission-free list.


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Re: ETF's with free trades (e.g. iShares): What's the catch?

Postby Default User BR » Fri Dec 21, 2012 3:18 pm

wshang wrote:
Default User BR wrote:TD Ameritrade has a commission-free ETF list . . .

Yeah, be careful if you dividend reinvest.

You also need to explicitly sign up for the plan, you can just buy stuff from the list and avoid the commission.


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Re: ETF's with free trades (e.g. iShares): What's the catch?

Postby RyeWhiskey » Fri Dec 21, 2012 3:25 pm

wshang wrote:
Default User BR wrote:TD Ameritrade has a commission-free ETF list, which includes many popular Vanguard offerings, but they restrict frequent trading (basically charging the buy and sell commission if you unload too soon).Brian

Yeah, be careful if you dividend reinvest. If you sell the entire holdings, you may be within the window and get charged a trading commission. I think this might be a sneaky method TD uses. Best not to dividend re-invest or watch the calendar.


Can you explain this a little further? If I understand correctly, you're saying that reinvesting dividends results in a new "trade" within their system. So if one was to sell one's shares shortly after reinvesting the dividend, they would see this as 'short-term trading' and slap you with a $20 fee?
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Re: ETF's with free trades (e.g. iShares): What's the catch?

Postby wshang » Fri Dec 21, 2012 3:37 pm

RyeWhiskey wrote:
wshang wrote:
Default User BR wrote:TD Ameritrade has a commission-free ETF list, which includes many popular Vanguard offerings, but they restrict frequent trading (basically charging the buy and sell commission if you unload too soon).Brian

Yeah, be careful if you dividend reinvest. If you sell the entire holdings, you may be within the window and get charged a trading commission. I think this might be a sneaky method TD uses. Best not to dividend re-invest or watch the calendar.


Can you explain this a little further? If I understand correctly, you're saying that reinvesting dividends results in a new "trade" within their system. So if one was to sell one's shares shortly after reinvesting the dividend, they would see this as 'short-term trading' and slap you with a $20 fee?

Exactly, but I am not precisely sure if it will be $9.99 or 2X that.
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Re: ETF's with free trades (e.g. iShares): What's the catch?

Postby RyeWhiskey » Fri Dec 21, 2012 3:45 pm

wshang wrote:
RyeWhiskey wrote:
wshang wrote:
Default User BR wrote:TD Ameritrade has a commission-free ETF list, which includes many popular Vanguard offerings, but they restrict frequent trading (basically charging the buy and sell commission if you unload too soon).Brian

Yeah, be careful if you dividend reinvest. If you sell the entire holdings, you may be within the window and get charged a trading commission. I think this might be a sneaky method TD uses. Best not to dividend re-invest or watch the calendar.


Can you explain this a little further? If I understand correctly, you're saying that reinvesting dividends results in a new "trade" within their system. So if one was to sell one's shares shortly after reinvesting the dividend, they would see this as 'short-term trading' and slap you with a $20 fee?

Exactly, but I am not precisely sure if it will be $9.99 or 2X that.


That's kind of back-handed, but I'm buying and holding for the long run with my TD Ameritrade brokerage account (HSA Bank) so it doesn't really affect me. Good to know however should there come a time when I need the funds - I'll be sure to pay attention to the last dividend date.
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