Online brokers are in a very competitive space. When Charles Schwab lowered its online trading commission from $8.95 per trade to $6.95 in 2017, within days Fidelity lowered its commission from $7.95 to $4.95. That led Schwab to cut a second round from $6.95 per trade to $4.95. During that short period of a few weeks TD Ameritrade and E*Trade also cut their commission to stay competitive.
Vanguard announced last week they will make almost all ETFs (except leveraged and inverse ETFs) trade commission-free starting in August 2018. Fidelity, Schwab, TD Ameritrade, and E*Trade all have their own list of commission-free ETFs, but none is as all-encompassing as Vanguard’s come August. Will these other online brokers match this move by Vanguard?
We shall see, but if I were the executive at these companies making this decision, I wouldn’t match.
Vanguard manages a large number of popular ETFs. Vanguard must have data that shows their customers who invest in ETFs use predominantly Vanguard ETFs. By opening up commission-free trades to all other ETFs, Vanguard doesn’t expect to lose much when they are able to keep the customers in Vanguard products through marketing. To the extent new customers come to Vanguard because Vanguard offers almost all ETFs commission-free, Vanguard must be confident that they are able to make most of these new customers end up in Vanguard products anyway.
It’s a different story at Fidelity, Schwab, TD Ameritrade, or E*Trade. They receive compensation from other ETF providers for giving preferential treatment to those providers’ ETFs. Fidelity and Schwab have some their own branded ETFs, but those are not nearly close to the scale of Vanguard ETFs. If they match Vanguard’s move and make almost all ETFs commission-free, not only will they lose the payments they currently receive from those other ETF providers but more assets inevitably will flow to Vanguard ETFs, which will let Vanguard earn more management fees and give Vanguard more ammunition to compete with them.
Fidelity, Schwab, TD Ameritrade, and E*Trade currently already offer commission-free ETFs that more or less match Vanguard’s most popular ETFs. Fidelity has iShares ETFs. Schwab has Schwab ETFs. TD Ameritrade has SPDR Portfolio ETFs. E*Trade has some of the most popular Vanguard ETFs on its list. They say to their customers “See, you don’t have to go to Vanguard. You can do the same thing here.” Customers who’d like to save a few dollars in commissions just use the alternatives.
To other ETF providers such as iShares and State Street, Fidelity, Schwab, TD Ameritrade, and E*Trade are helping them with distributing their products. Paying for preferential treatment is working very effectively. It was reported that State Street’s SPDR Portfolio ETFs gained a lot in assets after they became the preferred ETFs at TD Ameritrade. These other ETF providers fully expect Vanguard customers will still favor Vanguard’s own products even after almost all ETFs trade commission-free at Vanguard. Therefore cutting off payments for preferential treatment at other brokers and trying to win on Vanguard’s home turf would be a lost cause. I don’t think they will bite the hand that feeds them.
Merrill Edge effectively has all ETFs (and all stocks too) commission-free for anyone with $50,000 and a free Bank of America checking account. They give 30 free trades per month to these customers. While not unlimited, 30 free trades per month are plenty to practically everyone and the $50k hurdle isn’t that high to clear. Merrill Edge has had this for as long as I can remember going all the way back to 2010. No other brokers matched it. No ETF providers did anything special in order to win on Merrill Edge.
As a customer I’d like to see Fidelity, Schwab, TD Ameritrade, and E*Trade match Vanguard’s move and make almost all ETFs trade commission-free, but I see good business reasons they won’t. I don’t blame them. I choose to pay $5 per trade to buy Vanguard ETFs at Fidelity because I like Fidelity’s IT systems and customer service. If the $5 bothers me I just buy an iShares ETF. I’d welcome it if they make it $0 but if they don’t I’m not going to leave because of it.