The bugaboo for many investors has been the transaction costs. Where mutual funds often trade on a no-load basis — meaning free of sales charges — ETF transactions traditionally have carried commission costs.

Share story

Your Funds

It was punch/counter-punch in the battle for your exchange-traded fund dollars last week, and the winner was small investors.

On Tuesday morning, Charles Schwab announced it was doubling to over 500 the number of commission-free exchange-traded funds on its ETF OneSource platform. Beginning March 1, the platform will add State Street Global Advisers SPDRs and the iShares ETFs to its lineup of funds that can be traded without a commission, an early-redemption fee or an activity-assessment fee.

That means completely free trading on the ETFs in the program.

Fidelity Investments responded to the news less than a half-hour later with its own announcement, also expanding the number of commission-free ETFs available on its brokerage platform to more than 500, also adding iShares (and on Feb. 28, so a full day earlier!), among others.

With more than 500 ETFs now available commission-free, exchange-traded funds are closing the one remaining gap where they tended to be less attractive than traditional funds. They also are making trading more appealing and, potentially, profitable.

There’s no bigger winner between traders and buy-and-holders in this case.

It’s more like you win if the changes can impact and improve your trading and you also win if they allow you to more efficiently use ETFs for long-term holdings.

For years now, exchange-traded funds have been the rising power in the fund business. Essentially, they are mutual funds that are built to trade like stocks, meaning they trade moment-by-moment (instead of being priced only at the end of the day), with some underlying characteristics that can make them more tax-efficient and less costly.

The bugaboo for many investors has been the transaction costs. Where mutual funds often trade on a no-load basis — meaning free of sales charges — ETF transactions traditionally have carried commission costs.

Discounted commissions have reduced that burden, but a few dollars still was enough to make it so that ETFs would not work for small investors interested in dollar-cost averaging into a fund. Several dollars in commission amounts to a significant sales charge for someone plowing $50 or $100 a month into an ETF.

Investors long ago figured out that they don’t want to pay high expense ratios on funds. Paying, say, $4 in transaction costs on a $100 deposit — and doing it repeatedly — would be dumb, so consumers really have not used ETF accounts to slowly accumulate assets over time.

The dramatic expanse of commission-free trading means that investors who prefer ETFs can now use them on small trades to build positions. While ETFs were built to be trading vehicles, this makes them more attractive to the long-term investors with small dollars, who can now build a portfolio efficiently with regular electronic deposits being added to their account without a trading cost.

The expansion of commission-free ETFs should also appeal to any traders, trend-followers and factor investors, because it reduces the cost of their strategies.

The impact is biggest for traders, especially if they can also avoid early-redemption and activity-assessment fees. These additional costs are often buried in the fine print, so investors fall for the big headlines touting the lack of commission but fall into a trap where no-commission doesn’t always mean no-cost.

At Fidelity, for example, activity-assessment fees ranging from a penny to 3 cents per $1,000 in principal are applied on sales. Lost dimes and quarters won’t send a trader to the poor house, but they do increase friction costs and raise the bar for how successful a trader must actually be to hit their targets.

This is important because many ETF traders are using systems and indicators, and the money they don’t spend on commissions or other applicable fees goes directly to their bottom line.

An ETF trader until now has had to either limit their universe to the items they can trade sans commission or they have had to price the transaction costs in to their models. If you make a 5 percent profit on a trade, but the commission costs would eat that up, you’re in break-even mode.

Now, traders can look for systems that work with a thinner margin for success, because they don’t have to overcome the transaction costs.

For many small and beginning traders, that difference will make trading easier and may be the ultimate difference between consistent profits and losses.

Remember, too, that the long-term studies showing market returns have always been calculated without transaction costs. Thus, when investors have been told that large-cap stocks deliver an annualized average return of 10 percent over time, the truth is that experts expected individuals to earn a bit less than that.

With investors getting what they don’t pay for, eliminating transaction costs is a win.

The next step is continued lowering of expense ratios, and that is likely the next shot to be fired in the cost battle. Fidelity has already created index funds that charge no expense ratio; more of that kind of action — and a further drop in expenses — is almost certain to be next.

Ultimately, this doesn’t necessarily change anything for a lot of investors. If you haven’t wanted to dollar-cost average into ETFs or to trade ETFs, there is no reason to make a change now.

That said, every time that fund companies fight and lower fees, all investors benefit. It’s never a bad time to see if you can be one of the people who benefit from these deals and the changing cost conditions in the industry; don’t be content to stick with old cost structures if the new ones will put more money in your pocket.