Will We Soon Trade ETFs for Free?

Exchange-traded funds may be the best products ever to come along for retail investors, but they still have at least one major drawback: they incur a trading commission every time you buy and sell them. If you’re a customer of one of the big bank’s discount brokerages, you pay as much as $29 per trade, a fee that makes monthly contributions and dollar-cost averaging prohibitively expensive.

Claymore took a big step toward improving this situation last year when it became the only ETF sponsor to offer pre-authorized cash contributions (PACCs): after making an initial purchase, you can arrange to make regular monthly, quarterly or annual contributions without additional fees. Unfortunately, not all brokerage houses have embraced this arrangement yet (I recently had problems setting up a Claymore PACC with Scotia McLeod), and it’s not as flexible as what you’d get from a portfolio of mutual funds.

But the game is beginning to change, at least south of the border. Beginning today, Fidelity Investments in the US will allow its customers to buy a lineup of 25 popular iShares ETFs with no trading commissions. The move follows a similar one by Charles Schwab, which launched its own line of commission-free ETFs last November.

Canadian banks and their brokerages have a long tradition of charging high fees for just about every service they offer. Now there’s an opportunity for one of them to show some leadership. BMO recently expanded its ETF lineup to an impressive 22 funds. What better way for the bank to win new investors than to start offering BMO InvestorLine customers the ability to buy and sell its ETFs commission-free?

Following Claymore’s lead, BMO already offers a dividend reinvestment plan (DRIP), so perhaps they’ll consider taking things to the next level. The bank’s ETFs now command just 1% of the market: iShares holds about 80% of all ETF assets in Canada, and Claymore about 14%. And let’s face it:  there is no incentive for iShares customers to switch. Sure, BMO’s large-cap Canadian equity fund, ZCN, is two basis points cheaper than iShares’ flagship, XIU. But it holds a mere $48 million in assets, compared with XIU’s $10 billion. iShares products offer investors a track record and liquidity that BMO can’t hope to match.

If BMO is going to make its ETF venture succeed, it should offer something Canadian investors can’t get anywhere else. By allowing clients to trade ETFs without commissions, BMO would attract a wave of new customers: not only would they grab at least some of the market share from iShares and Claymore, they might even take a run at TD. Their e-Series mutual funds are currently one of the best deals going for Couch Potatoes, but commission-free BMO ETFs might be even better.

There’s already a precedent with Fidelity and Schwab in the US. Will BMO have the courage to follow? And if they do, would you switch?

3 Responses to Will We Soon Trade ETFs for Free?

  1. missnb20 February 3, 2010 at 1:04 pm #

    If bmo offered commission-free etfs, yes I would switch to their ETFs since I already have an investorline acct. In fact, if they did I would transfer my td e-funds rrsp acct to my investorline acct and buy the bmo etfs. I’d also encourage my husband to sell his ishares etfs and buy the bmo ones or put new money into the bmo ones.

  2. Canadian Couch Potato February 3, 2010 at 9:32 pm #

    A follow-up note: Questrade contacted me to assure readers that they have a straightforward procedure for setting up PACCs with Claymore ETFs. A list of other brokerages that support the service is available on Claymore’s website:
    http://www.claymoreinvestments.ca/etf/investment-services

    Unfortunately, none of the big-bank brokerages has a checkmark beside its name. If any readers have had good or bad experiences setting up a PACC with Claymore ETFs, please post a comment or send me a note and I’ll spread the word.

  3. Bankr November 25, 2010 at 11:12 am #

    I like investing in Cdn banks because they have decent dividends and probably won’t go tailspinning off like Ireland or US money centre banks. I’d rather they did not embark on global expansion plans or even US expansion plans – being a financial utility and being relatively protected from competition (I guess foreign banks don’t like our onerous capital requirements etc.) means a steady stream of dividends.

    I DON’T like the fact that they don’t have decent DRIP/PACC programs so I set those up with CIBC Mellon or Computershare. I can write a *very small* cheque and buy only a few shares at a time (saving paper route and bottle collecting money) and buy myself income producing shares. All my registered accounts (RRSP TFSA LIRA) hold mostly interest producing investments: GICs (I still have some at 5%), bond funds, REITs, with dividends and dividend producing stocks outside.

    BUT I CAN’T DO THIS WITH ETFs so I am now setting up *another* trading account with Qtrade (via my credit union) to deal with ETFs this way. Sigh …

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