Beware of These ‘free’ ETF Gimmicks
Exchange-traded funds are getting cheaper and cheaper for the average investor as several firms have introduced or expanded their free options over the past few months. For example , in August, Vanguard gave investors access to nearly 1,800 different ETFs without commission. Charles Schwab and Fidelity have also expanded their commission-free offerings.
And while these changes are one indication that costs for retail investors are generally on the decline, there are still a few things to look out for.
As Money Magazine explains , these so-called “dummy funds” are being offered as a way to get customers to spend money on other products and services offered by brokerage firms. “This could mean encouraging you to buy more expensive actively managed funds; cash products, such as net accounts, which may offer sub-optimal interest rates; or additional services for individual consultation ”.
Once they show up at their doorstep, they expect you to be more likely to invest in their other products. But you will want to counter that inertia and compare any new financial product across several different firms.
Plus, you have to be careful about investing in all of these commission-free offers right from the start. “While the new offerings mean that investors can now trade a lot more niche and specialized funds for free, they tend to be much more expensive than regular offerings,” writes Money. After all, you don’t need 300 different funds, although there are some solid classroom offerings with no commission.
Also note that brokerages may modify these offers as TD Ameritrade did . If you invest in them through a taxable account and then want to move your money, you will be taxed on your profits.
As always, you will want to consider the cost-to-stock ratio for an ETF, regardless of its trading fees. Keep it simple .