Commission-Free ETFs at Canadian Discount Brokerages: A Clever Lure or a Good Deal for Investors? Part 2

Tips to Help Navigate Commission-Free ETF Offers

In the case of commission-free offers with limited selections of ETFs, the consensus is that even though commission-free ETFs can be useful to lower trading costs, ultimately whether or not the ETF is a sound investment should take precedence over the commission associated with either buying it or selling it.

Here are four tips consistently mentioned in several sources that self-directed investors should be aware of when considering commission-free ETFs from a discount brokerage:

1. Consider the total cost of doing business with a discount brokerage.  If they are giving away commission charges on trades there might be other fees on which they make their money back, such as minimum trading activity fees, higher margin rates or account fees.
2. Commission-free doesn’t equal “no cost”. There are still costs to consider when investing in an ETF, in particular the management expense ratio (MER).  Some of the ‘selected’ ETFs might have higher MER’s than identical products from competitors and so while commission saving might be nice, it may not make the best financial sense when looking at the expenses associated with the ETF.  Also keep in mind that there might be minimum order requirements (such as National Bank Direct Brokerage’s $5000 minimum ETF purchase) that could tie up capital.
3. Decreased cost might mean an increased tendency to ‘tinker’ with a portfolio rather than sticking to a plan.  Increased transactions, however, don’t always lead to better returns and often they lead to the opposite. Investors should be disciplined when buying and selling – even if there are no commission costs, and especially when there are.
4. The price you see might be different than the price you pay. As with purchasing or selling any ETF, because it trades like a stock there is a bid price and an ask price. With so many ETFs now on the market not all of them can be equally liquid or popular and as a result the spread between the bid price and the ask price can be quite far apart.  For this reason, using limit orders rather than market orders is often suggested as a means to better define entry and exit prices.  When using limit orders, however, the usual caveats about actually getting the order filled when using this order type still apply.

In part 3 of this series, we take a closer look at the costs and benefits of each of the discount brokerages’ commission-free ETF offering.