Editor’s note: This segment originally aired in Nov. 2010
The cost of investing is getting cheaper and cheaper as another discount broker has offered commission-free exchange-traded funds (ETFs).
For those of you who are unfamiliar, ETFs are an investment product that was initially designed for the big money crowd. They’ve historically not been for the average Joe because they had huge expense when either bought or sold.
But ETFs are morphing into a product that’s fantastic for individual investors as more players start offering them without any buy/sell commissions.
ETFs are bought and sold just like stocks. They typically have a better tax treatment than a mutual fund, plus lower management fees. In some cases, the management fees can be one-twentieth the cost of what you get with a typical mutual fund!
In February 2010, Fidelity Investments and Charles Schwab kicked off a price war by offering a smattering of ETFs commission free. Their one-upmanship really changed the game and put ETFs within reach of the average investor. Owning an ETF suddenly became ultra cheap as management fees dwindled and buying and selling became commission free.
Not to be outdone, Vanguard stepped up with its own slate of commission-free ETFs in May 2010.
Now the latest entry into the market comes from TD AmeriTrade, which is now offering more than 100 different commission-free ETFS.
This really democratizes investing in my mind. It’s now possible to build a very diverse ETF portfolio that touches on all of American capitalism, plus established international holdings, emerging markets and some bonds.
Another unexpected benefit: Say you’re the kind of investor who hires a professional to handle your money, and maybe you pay one percent in management fees, plus the expense of the actual investments.
Well, now you’ll just have the management fee and almost no additional cost for the investments if you’re in just ETFs. So it could now actually be cheaper to hire someone else to manage ETFs for you than it would be to pay for mutual funds that you pick yourself!