Vanguard begins  experiment that pushes free ETF trading to its limit


Previously, Vanguard offered free ETF trading only to investors holding at least $1 million in a brokerage account, and even then there were limitations on how often ETFs could be traded in a 12-month period. Now there will be no restrictions, and no minimums required, to use the free-trading feature with any ETF.

ETF experts expect Vanguard rivals to fire back with their own enhanced free-trading offers. All of the established players in the financial services sector also face pressure from venture capital-funded start-ups, such as Robinhood, which offers a free brokerage trading app and has been growing rapidly — in May Robinhood surpassed E-Trade in number of users for the first time. As the fee war continues in the exploding $3.5 trillion ETF market, experts are concerned that the line between helping consumers with low-cost investments and potentially hurting them could be crossed.

“They can’t all go commission-free, but they’ll also have to expand their lineups if they want to stay competitive,” said Neena Mishra, director of ETF research at Zacks Investment Research. “While there is no doubt that investors are big winners as the fee war escalates, the downside is that the ease of trading and low transaction costs are also leading investors to trade more often, particularly in volatile markets. … Volatility is back this year, and that’s probably leading to too much ETF trading,” she said.

On Wednesday, Fidelity announced it was launching the industry’s first-ever index funds without any management fee, a core U.S. and a core international equity fund. This move has long been speculated on by index fund and ETF experts as the major asset managers have continued to push down fund management fees near zero in what has been described as an endless fee war. “Investors will pay a 0.00 percent fee, regardless of how much they invest in either fund, while gaining exposure to nearly the entire global stock market,” Fidelity said in a release.

A recent survey conducted by Schwab found that most millennials say that ETFs provide the flexibility needed to react to short-term market swings. Eighty-nine percent said they expect to allocate more of their portfolio to ETFs during periods of market volatility. “That says a lot,” according to Mishra.

ETFs make it easy to chase performance of the hottest segments and short the worst-performing ones, but investors have a history of piling into hot ETFs after the easy money has been already made, or shorting the weakest segments after they have already hit a bottom. “Trying to time the market is usually a futile exercise, and in fact, too much trading leads to subpar performance,” Mishra said.

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