In the final part of our series on commission-free ETF trading at Canadian discount brokerages, we look at the offers from Virtual Brokers and Questrade and conclude the series with some lessons learned from researching commission-free ETF offers.  If you missed the earlier parts of the series, click here for part 1, here for part 2 or here for part 3.

Commission-Free ETFs at Virtual Brokers

While Virtual Brokers started offering commission-free ETF trading on a limited set of ETFs, in 2012 they rolled out commission-free ETF purchases on all ETFs.  Because they have two “commission-free” ETF offers going concurrently, a great deal of confusion appears to have been caused with investors.  As such, it bears repeating that at Virtual Brokers, all ETFs can be purchased commission-free but only a certain set of ETFs can be purchased and sold commission-free.

Committing to a list of 100 ETF funds by 17 different fund providers is a bold undertaking within the ETF space.  Because funds change according to market forces, staying on top of which funds are still functional proved to be a challenge for Virtual Brokers.

An interesting discovery that was made when looking into the list of 100 ETFs advertised by Virtual Brokers was that their list contained a mixture of duplicate names, miscategorized ETFs and ETFs that had been discontinued.  For example, the XID (iShares S&P CNX Nifty India Index Fund) appeared twice in the list (see below); CEW is the ticker symbol for both the WisdomTree Dreyfus Emerging Currency Fund and the Claymore (now iShares) Equal Weight Banc & Lifeco ETF however both were listed as being on the Canadian market (the WisdomTree ETF is listed on the NYSE); four ETFs were identified in the advertised list that had been discontinued for months: DENT, HAG, HIF and XRO; and lastly, many of the ETFs branded as Claymore had yet to be renamed to their new iShares titles.

To Virtual Brokers’ credit, when these issues were pointed out to them, a senior representative confirmed that they would be corrected and after several emails, the list was updated and corrected within 24 hours.  The new list has addressed the issues identified above with Virtual Brokers committing to keep their list of commission-free ETFs at 100.  ETFs that have been added to replace the discontinued group include First Asset Canadian Convertible Bond ETF  (CXF), Horizons Alphapro Balanced (HAA), First Asset DEX Government Bond Barbell Index ETF (GXF), First Asset DEX Corporate Bond Barbell Index ETF and the SPDR Barclays Short Term Treasury ETF (SST).

The fact Virtual Brokers faced a challenge keeping up with their own offers should serve as a lesson to investors. The ETF landscape is highly dynamic and the more specialized ETFs or those that might be more ‘exotic’ are also more prone to being discontinued from lack of investor interest.  It would be wise to double check the availability of an ETF on the commission-free list ahead of placing any trades.

Despite the number of ETFs offered commission-free, the majority of funds (>60%) are equity-focused.  Unlike the other two discount brokerages’ ETF selections, however, Virtual Brokers’ pool contains a couple of leveraged & inverse-leveraged ETFs which more active traders might find more appealing.  Of the three discount brokerages offering commission-free ETFs, Virtual Brokers is also the only one that includes several BMO ETFs.  While Virtual Brokers has a more diverse offering of ETF providers (17 providers), over 75% of the commission-free ETF pool comes from only three of those providers.

The fine print on the Virtual Brokers commission-free ETF offer is reasonably straight forward.  Two key points to keep in mind for this offer are that in order to be eligible for commission-free ETF trading:

1. ETFs must be held for at least one business day
2. ETF trades must be placed via the WebTrader platform

There is no minimum purchase amount required so this is positive news for individuals with more modest portfolios.  Also a positive feature, no commissions are charged at the time of purchase (and where applicable at the time of sale).  In certain instances, other discount brokerages will deduct a commission fee at the time of the trade then issue a refund for the commission usually within a few days of the transaction.

Commission-free ETFs at Questrade

As of early 2013, Questrade became the fourth Canadian discount broker to jump into offering commission-free ETF trading to clients.  Specifically, Questrade’s offer allows clients to purchase any ETF commission-free and when clients sell ETFs they are charged the standard commission rates.

To Questrade’s credit although they have done quite a bit of marketing around being able to “Buy ETFs for Free” their page explaining the offer clearly lays out the terms of the offer and whether additional charges may apply.  For example, even though no commissions are charged on the purchase of any ETF, fees such as ECN fees may still apply. An important point to note is that buying of ETFs does not count towards minimum trading activity thresholds now in place at Questrade.  Only trades that generate a commission count towards activity thresholds and data-fee rebates (something that may impact Advantage plan users).

While there are charges associated when ETFs are sold, the fact that there is a break on the commission price at the time of purchase is a plus.  It is also far less work to keep track of which ETFs are or aren’t eligible for commission-free status.  As with the other discount brokerages, though, Questrade reserves the right to modify the offer at any time without notice.

Lessons Learned While Researching for Commission-Free ETFs

One of the major takeaways from doing the research on this series was how important it is for individuals to do their homework when considering commission-free ETFs.   While the lure of “free” is always appealing, the kinds of marketing that gets used certainly suggests the absence of costs when, in fact, many of those costs simply show up in other places.  As with any other product, caveat emptor (buyer beware) still applies – even with promotional offers from discount brokerages on ETF trading.

Ironically and unfortunately for investors, there can be obstacles that get in the way of them being able to do the homework.  For example, when looking at the iShares Canada website for information on 10 iShares funds listed (GBF,IYG,IYW,DSI,ICLN,RXI,MXI,IXN,IXP and JXI) as part of the Qtrade offering, the website denied entry if you happened to be an individual investor.  The website message stated that only financial professionals were allowed to view that information.

Interestingly, the information for those funds was accessible via Yahoo Finance and Morningstar.   For investors looking to get information from the source provider though, this can be a confusing scenario as the provider suggests the product is only suitable for professionals whereas neither the brokerages nor the data providers (Yahoo or Morningstar) make that distinction.

The second takeaway lesson for investors considering commission-free ETFs is that keeping up with such a dynamic space is incredibly challenging.  As recent articles have started to suggest, the “enthusiasm” around creating ETFs and the ease with which they can be created has led to more funds being available than there is capital or interest to purchase them.  In spite of enthusiasm being pointed to by some recent ETF provider sponsored studies, supply and demand will ultimately determine which ETFs last and which fold. Funds that are popular and highly traded stand better chances of being around than do some of the more exotic or newly created funds.   So where does this leave investors?

Conclusion

Ultimately the ETF providers are in business to make money, as are the discount brokerages so just because something is being offered for free doesn’t mean there isn’t a catch somewhere. It is up to consumers to figure what that catch might be. Often, a good test of value of commission-free ETFs is to see what the management fees are and whether the savings on commission fees outweigh the potential increased cost of management. From an investor’s perspective, the option that provides the better portfolio performance is the better economic decision.

Overall, commission-free ETF offers create a lot of marketing that self-directed investors need to wade through.  While these plans can offer some investors a real break on costs, it is important for self-directed investors to understand exactly what it is they are being offered and whether a similar (and cheaper) alternative exists.

Individual investors are likely to benefit more from knowing what kind of strategy they want to use to invest in ETFs with before looking to these commission-free offers as selling points from any one particular brokerage.  Even though there may be savings on commissions, there are always other fees that investors need to be vigilant about in order to ensure they get the best return on their discount brokerage investment.