Vanguard Enters ETF Free Trading War

May 7, 2010 by  
Filed under Commentary, ETFs

First Schwab, then Fidelity, now Vanguard is offering no-transaction-fee trading of its proprietary ETF products through its brokerage unit. The march toward free – or practically free – ETF trading is continuing with barely a pause. In a new commission schedule announced May 4, Vanguard began offering free trading of its own ETF family. At the same time the firm reduced fees on non-Vanguard ETF trades to as low as $2 for clients with balances above $500,000.

The Vanguard NTF program is superior to the others for at least one reason: it includes a suite of sector funds, a feature missing from the Schwab and Fidelity offerings. Vanguard’s full menu includes 45 ETFs covering all the standard style, sector, international, and bond categories. With the ability to trade ETFs from other sponsors at minimal costs, ETF investors would be well-advised to take a look at Vanguard for their brokerage needs.

I was initially surprised by this news in part because Vanguard has long been a philosophical enemy of active trading. More than any other firm, Vanguard has done everything in its power to keep short-term traders out of its mutual funds. The ETF structure largely solves this problem, so one might think Vanguard would be glad to have anyone’s assets. Apparently not. A footnote to the new fee schedule says “If you buy and sell the same Vanguard ETF in a Vanguard Brokerage account more than 25 times in a 12-month period, you may be restricted from purchasing that Vanguard ETF through your Vanguard Brokerage account for 60 days.”

In other words, Vanguard loves active traders as long as they are not too active. Of course 25 trades per fund per year is a very generous limit, probably enough to satisfy all but rapid-fire day traders. I suspect many people will be glad to live with this restriction in exchange for fee-free access to Vanguard ETFs. The next question: How will the competition respond? I can’t wait to see.

Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned. Our affiliate, Capital Cities Asset Management, uses Fidelity Brokerage Services as a custodian and brokerage for client accounts.

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