How commissions on ETFs work
Usually, banks charge a fee for every trade you make. If you make more than 150 trades a quarter, the charge can be between $6.99 and $9.99 a trade, depending on the financial institution. If you trade less frequently you could pay as much as $29.99 per trade. Those fees add up. 150 trades a quarter at about $10 a trade is $1,500. By the end of the year, if you trade frequently enough, you could easily spend $6,000 on commissions alone. Fortunately, the days of commission fees -- at least on ETFs -- could be ending. In September 2011, Scotia iTrade announced that it was offering 46 ETFs commission-free. That's big news and finally puts Canada more in line with the United States, which has been offering no-commission ETFs for years.
Investors should be excited about this development. Here's why.
Commission-free ETFs are cheaper
As mentioned above, investors can save a lot of money if they don't have to pay commissions. The difference might be negligible if you buy and sell an ETF only once or twice a year, but if you trade more frequently those fees will add up. Think about putting the money you'll save back into the market.
Commission-free ETFs mean higher real returns
While your investments might rise three per cent in one year, if you want an accurate reflection of how much you've actually made you need to include the cost of fees. So this point is simple -- a lack of commission fees will result in higher real returns.
Commission-free ETFs make it easier to invest
Research has shown that people are more averse to paying upfront fees than hidden costs. You don't pay your mutual fund dealer 2.5 per cent up front -- it's just taken out of your assets. If you did have to cough up that much before you invested, you'd probably keep your money under a mattress. With commission fees removed, you'll be more inclined to invest. You won't think twice about that $29.99 fee anymore. That's good news for your portfolio, which needs a regular influx of cash to really grow.
How to experiment with ETFs
ETFs are typically bought by do-it-yourself investors through an online brokerage. For people who aren't familiar with buying securities online, or maybe were thinking about it but haven't yet taken the plunge, not having to pay a fee makes the decision that much easier. There's less risk in trying it out.
Spend a few hundred bucks on a commission-free ETF. If you don't like it, sell the fund and walk away. You won't have to pay $60 in fees (about $30 for the buying and $30 for the selling) to get your feet wet.
So far, just Scotia iTrade and Qtrade are offering no-commission ETFs. But if the banks want to compete, they'll likely have to make a few funds available for free. If the United States is any indication -- people there have been trading without paying commissions on some ETFs for about five years -- commission-free investing will be here to stay.
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