Ameritrade Joins the Free ETF Party

The ETF free commission price war heated up some more today. TD Ameritrade is offering free commissions on 101 ETFs selected by Morningstar. But there is a little catch! Ameritrade will be copying an idea from the mutual fund industry, and will be charging a $19.95 exit redemption fee for any ETF holding held less than 30 days. (Note: Some articles and media reports have incorrectly reported this fee as $9.95).

Let’s say you purchase five lots of an ETF, and need to sell your entire position in less than 30 days from the first lot purchase. You will be hit with a $100 commission (actually $99.75).

Be careful- Ameritrade will be using LIFO (last-in first-out) to determine if any lot exceeds the 30 day period. So if you buy 100 shares of an ETF, hold it a year, then buy  a second lot of 100 shares and sell it in less than 30 days, you will still be hit with the $19.95 fee.

Some other key points:

  • The ETF free commission only applies to long positions, not to short sales.
  • No leveraged ETFs are included in the 101 ETFs.
  • If you have a margin account and get a margin call, you will be exposed to the $19.95 exit redemption fee for any lot owned less than 30 days.
  • Ameritrade’s 101 ETF’s are issued by nine different companies- iShares, Vanguard, State Street, Barclays, Deutsche Bank, iPath, PowerShares, Van Eck and Wisdom Tree.

I think it is great that Ameritrade has joined the free ETF commission community, but I am quite concerned that their ETF exit redemption fee “concept” may be adopted by other brokerage firms that already offer free ETF trading (Schwab, Fidelity, Vanguard), and that the exit redemption fee period could start creeping up from 30 days to 90 days or even 180 days. This would greatly reduce the attractiveness of using ETFs in tactical allocation models.

I read an article today saying that Ameritrade’s earnings would not be greatly affected by introducing free ETF commissions, because this is currently a fairly small percentage of their commission revenues. But there is a possibility that as time goes on, more investors and financial advisors will sharply reduce trading in individual equities and move almost exclusively to free ETF trading.

Many discount brokerage firms also make significant revenues from customer money held in near-zero interest money market accounts. Some of this revenue may also be lost as customers invest money in low risk fixed income ETFs instead of leaving more funds in cash. It will be interesting to see if this actually happens or if inertia wins out. I think Ameritrade is betting on inertia.

I wonder how long it will take for Scottrade and E-Trade to join the free ETF commission party. My guess is they will be forced to do so within the next year.


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