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The Truth About Commission Free ETFs

by Kevin Mulligan, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.

Exchanged-traded funds are a great investment tool with low expense ratios that can be used to build a diversified portfolio quickly. ETFs can also be used to segment part of your portfolio into various niches that interest you.  And the story gets sweeter.  You can even buy ETFs without paying a commission as I wrote about recently.

That being the case, it might seem like a no-brainer to buy ETFs – especially the commission free version.  But I suggest that you slow down.  Let’s consider the benefits and drawbacks before you pull the trigger.

Positives and Negatives of Commission-Free ETF Trades

Not having to pay commissions on ETF trades sounds like a great deal.  And it can be. But there are some negatives to be aware of before you completely move your portfolio to only ETFs.

Upsides of Not Paying a Commission on ETF Trades

Never Pay a Commission Again

The most obvious upside to the commission-free ETFs offered by your broker is that you will never pay a commission on those specific ETFs. That means that if you research the ETF carefully you could build an entire diversified portfolio, enjoy the minimal expense ratios, and not pay an extra dime in fees to the broker.  Nice.

Trade During The Day

Another upside is you can trade in and out of ETFs during the day. You don’t have to wait until the end of the trading day (or the end of the next business day’s trading day) as you do with mutual funds. ETFs are traded like stocks on the stock exchanges so you can buy and sell whenever you like. When you don’t have to worry about commissions for your broker you can trade as frequently as you like.  (Please note that some brokers charge you a fee if you trade out of a commission free ETF within 30 days of purchase.)

Dollar Cost Averaging Works

Never paying a commission to invest in an ETF means you can continue to dollar cost average your portfolio. Paying $4, $7, or $10 per trade or more makes automatic investing with exchange traded funds a poor financial choice. The commissions eat up the expense ratio savings and then some. By removing the commission from the equation you don’t have to worry about the costs eating up your savings, allowing you to continue to dollar cost average in your investments each month.

Downsides of Not Paying a Commission on ETF Trades

Of course there are some downsides with any investment, and commission-free ETFs are no exception.

Select ETFs Only

The first major issue is that only a select number of ETFs get the commission-free treatment at most brokerage firms. Your ability to build a complete portfolio will be determined by which ETFs are offered and whether or not they fit into your desired portfolio.

Ask/Bid Spread

As with any trade on a stock exchange there is an ask/bid spread where the middle man makes his money. If you want to invest in this type of investment, you have to accept that there is a spread that impacts you.  Often the broker only offers commission free ETFs that have very little volume.  That means they are not very liquid and investment liquidity is very important.  As liquidity declines the spread between ask and bid widens.  That can be very expensive for traders. If you only trade commission free ETFs you could end up spending a lot more money on this spread than you save with the commissions.

Tracking the Right Index

Even if you technically can put together a portfolio using ETFs it may not be as well diversified as a different mutual fund option (or commission-required ETF). For example, your broker might offer you a stock index ETF that tracks the Wilshire 5000 instead of the S&P 500 or a US-only bond index tracking ETF instead of a global bond ETF.

Are Commission-Free ETFs Right for You?

Whether or not you should invest with commission-free ETFs over other ETFs or mutual funds depends on your investing goals. If you can legitimately use the ETFs offered without commission, there is no reason to not use them. If it is a bit of a stretch for you to justify using those specific ETFs you may be better off with a mutual fund or a commissioned ETF.

Do you restrict your investments to ETFs which are commission-free only?  Why or why not?

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Who is Neal Frankle

Neal Frankle

I'm a CERTIFIED FINANCIAL PLANNER™ Professional with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim.
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Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement.  We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement. We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

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Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement.  We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement. We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

YouTube Video UCoU0buhwVplzXrsyf342nOg

Retirement Crusaders

June 10, 2022 1:19 PM

Subscribe
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