ETF issuer battle heating up

By: ispeculatornew
Date posted: 10.26.2010 (4:13 am) | Write a Comment  (0 Comments)

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Earlier this month, TD Ameritrade announced it would be offering commission free trading on over 100 ETF’s for all of its customers. It’s not a new idea as a few other US brokers have offered the same thing. But it’s becoming a tendency that is sure to make customers very happy. Why? Because the battle of ETF’s vs Mutual Funds is entering into a new phase. Some time ago, brokers were still mostly fighting ETF’s by promoting its mutual funds harder and more aggressively.

Broker     Commission Free ETF’s
TD Ameritrade     101
Vanguard     47
Charles Schwab     11
Fidelity     25

There is a catch

TD Ameritrade has set a condition. Only ETF trades that are kept for 30 days or more will be eligible for the free trading. That is different than other brokers but is still interesting for the vast majority of individual investors who use ETF’s in retirement portfolio rather than do day trading.

Reality sets in…

I think most brokers now know that mutual funds are slowly losing the war and the only way they can remain interesting is with much diminished commissions. That takes away power in a big way for almost all of the brokers. Why? Because most brokers had their own offerings of mutual funds to sell to their clients which ensured a steady flow of commissions every year. As customers move from mutual funds to ETF’s, that has been dramatic on many levels for the brokers as the customers were usually not moving towards the equivalent ETF’s. What do I mean? Here is an example…

Customers who held a portfolio composed of TD Mutual funds started moving into ETF’s. But not TD ETF’s…rather ETF’s issued by Vanguard, Ishares, WisdomTree, etc. Why? Because those companies have products with cheaper commissions, and more variety. That of course translates into a loss of commissions for TD in this case…imagine that situation for millions of users… and you see exactly how big of a problem this represents.

Launching competitive ETF’s is much more difficult than similar mutual funds because of the fact that they trade all day long. That requires having liquidity and volume for the ETF’s which is much more complex and costly.

So what can a broker like TD Ameritrade do?

Basically, what TD can do is offer its customers free trades on ETF’s that will generate a steady flow of revenues. That makes it possible for the broker to grow its own offering over time and give solid products to its customers or sign agreements with issuers to get a portion of the management fees. The other side is also that TD Ameritrade customers who were trading these ETF’s will no longer be paying commissions which will impact the broker’s revenues. It will be interesting to see how things will evolve but brokers are in a very difficult position at the moment because of the emergence of ETF’s.

But really, they are in big trouble

It’s a great idea for brokers to give free commissions on these ETF trades but it’s worth noting that they will still be seeing very significant losses. ETF’s charge much much less than mutual funds for investors which translates into much smaller commissions paid out. Another point is that the major ETF issuers have a huge lead, in the technology, the products, methods, etc. Players like Ishares and Vanguard will be very difficult to catch for traditional mutual fund players.

Blackrock’s Ishares could easily launch a platform that would make it free to trade on all of their ETF’s and honestly it’s difficult to imagine most brokers being able to compete with that because of the scale….

Who is your broker?

Any thoughts on all of these tactics?

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