Best Brokers With Lowest ETF Commissions
For investors who primarily trade Exchange Traded Funds, there are several brokers that offer the lowest commissions on ETFs investing.
The attraction of ETFs is that one can select an ETF that represents a stock index such as the S&P 500, commodities such as
, and even a stock sector like biotech. It saves the investor from having to select
a specific stock and minimizes the company risk associated with single stock investments. The ETF world has grown considerably, and there are now
selections that multiply returns (and losses) by 100-200%.
Since some traders like to use ETFs for shorter time frames, commissions may become an important factor when selecting a broker. The lowest ETF commissions brokers
are OptionsHouse and TradeKing. An examination of these brokers’ commissions and services reveals a few differences to consider.
The commission at OptionsHouse is $4.95 per trade, even if a broker assists with the trade. That is a nice feature, where some
charge up to $40 to include a broker in the trade. This, combined with no maintenance or inactivity fees, as well as powerful trading tools makes
this discounter one of the best brokers for ETFs. One is limited in the areas of research and education, but that may be a low priority for ETF
investors. There is an additional fee $0.005 per share for trading a vehicle under $2, but most exchange traded funds are above that threshold so
it would not apply.
TradeKing’s ETF commission is $4.95 per trade, with an additional fee of $0.01 per share if the share price is less than $2. They do charge an
inactivity fee of $50, but don’t have account minimums or maintenance fees. TradeKing offers
excellent trading tools, educational resources and online community, so a trader does receive a bit more for their commissions spent on trading.
OptionsHouse or TradeKing?
As with most broker choices, exchange traded funds traders will have to make a selection based more on the services offered by each, rather than
significant differences in commissions. For both of these top ETF brokers trades placed for ETFs over $2 will all carry the
same commission cost. Therefore if you want the best trading tools then we recommend Optionshouse
If having access to trader community is important then TradeKing
is your broker.
What are ETFs?
Exchange-traded funds (ETFs) are an attractive option for many investors. First introduced to the markets in 1993, ETFs combine the
diversification benefits of mutual funds and the flexibility of individual stock ownership with lower fees and favorable tax treatment.
These attributes have made ETFs a popular investment choice; currently, almost a trillion dollars have been invested in ETFs worldwide.
Why have ETFs become so popular? The answer is rather straightforward – because an ETF is basically a mutual fund that trades like a stock.
ETFs have many similarities with the traditional mutual funds familiar to most investors. As its name implies, ETFs typically focus on holding
large “baskets” of stocks that are listed on a specific securities exchange such as the S&P 500. Individual investors purchase interests in ETFs
from large financial institution, which act as “middlemen” with the ETF. This ability to diversify is attractive to many investors because it
mitigates the risks inherent in holding a smaller portfolio.
How Do ETFs Work?
The ETFs goal, much like a mutual fund, is to replicate the performance of the exchange or index. For example, one of the largest ETFs by market
capitalization is Standard & Poor Deposit Receipts (SPDR). SPDR’s objective is to match the performance of the S&P 500
index for its investors.
In recent years, ETFs have evolved to include “exchanges” other than large market indexes. Today’s investor can participate in ETFs that hold
commodities (such as gold, oil and agricultural products), bonds and even currencies.
How are ETFs, Stocks and Mutual Funds Different?
With all of these similarities, what makes ETFs different than mutual funds? The key difference between the two investment vehicles is the
ability of the ETF investor to make trades throughout the day, while mutual funds generally allow purchase or sale transaction at the end of
each business for the net asset value of its shares. This factor presents a significant advantage for traders seeking to take arbitrage traders
seeking to take advantage of intra-day fluctuations in demand for ETF shares.
Essentially, ETFs allow the investor to deploy all of the strategies used with trading individual stock shares, while enjoying the benefits
of diversification. Investors can use limit orders (contingent sell orders that are executed only when a defined price threshold is reached),
short-selling (borrowing shares from a third party with the intent of returning them at a later date) and optioning (purchasing the right to buy
a share in the future at a defined price). This combination of diversification and flexibility gives the investor the best of both worlds.
ETFs have other advantages over mutual funds as well. Because they are typically not actively managed, the fees and costs of ETF share ownership
are generally lower than mutual funds; however, standard trading fees apply for executed transactions on the exchange. There are tax benefits
as well – since sales of individual stock shares are usually not required to redeem ETF interests, the potential capital gains tax liabilities
that can be realized from ETF sales are greatly mitigated.
As mentioned above, in addition to the traditional “index” ETFs, there are an increasing number of actively managed “niche” ETFs that specialize
in particular commodities or market areas. Commodities such as gold, tin, oil, natural gas and agricultural products are the most common and
popular niche ETFs.
In 2016, the three largest niche ETFs specialized in gold, silver and natural gas. Other specialized ETFs are available for particular business
areas such as health care, national markets and so on. ETFs can provide an attractive option for investors seeking the flexibility of stock
trading and the safety of diversification, without the management fees and potential tax liabilities inherent in traditional mutual funds.
The popularity of ETFs in recent years had led to an explosion in available investment choices, from the traditional index-based ETF to
specialized ETFs for particular sectors such as precious metals, energy and agricultural products. ETFs are poised to become even more
prevalent as many institution that offer employer-based 401(k) retirement plans will soon offer ETFs to plan participants.
As with any investment product, there are risks inherent in investing, as investors active in the market over the past several years can
attest. Nevertheless, the advantages of ETFs make it a smart move to consider them when building your investment portfolio.
Updated on 2/4/2016.