In part one of this series, we looked at which Canadian discount brokerages are currently offering commission-free ETFs as well as why commission-free ETF trading has started to become so popular. In part 2 of this series, we take a closer look at the types of commission-free offers available and provide some tips for investors who might be considering commission-free ETFs as part of their discount brokerage comparison research.

There’s commission-free and then there’s commission-free

While the term “commission-free ETF” does suggest a no cost transaction, in reality there are a couple of different interpretations as to what “commission-free” actually means.

Company	Number of Commission Free ETFs	Minimum Trade Amount	Hold Period (minimum)	Details Link
	All Canadian ETFs (>250)	$5000	1 business day	National Bank Direct Brokerage Commission-Free ETF Plan
	60	$1000	1 business day	Qtrade Commission-Free ETF Plan
	All ETFs* (only buys are commission-free)	$0	None	Questrade Commission-Free ETF Plan
	50	$0	1 business day	Scotia iTrade Commission-Free ETF Plan
	All ETFs* (only buys are commission-free)	$0	None	Virtual Brokers Commission-Free ETF Plan

As the table above shows, there are several ETF commission models being offered by Canadian discount brokerages.

First, there are those discount brokerages that offer a limited selection of ETFs that can be traded commission free – as in commission-free to buy and commission-free to sell.  The brokerages that offer this type of pricing are:

• Scotia iTrade (which offers 50 ETFs commission-free)
• Qtrade (which offers 60 ETFs commission-free)

Thus the trade-off is that there might be true ‘commission-free’ ETF free trading but only on a handful of ETFs. There are also minimum amounts of time (often at least 1 business day) that an investor needs to hold the ETF in order to qualify for commission-free status.

Another variation on ‘commission-free’ ETFs are from discount brokerages that allow purchases of any ETF commission-free but will charge the normal commission charge on the sale of the ETF.  Thus, only the purchase of the ETF is commission-free. The discount brokerages currently offering these types of commission-free ETF purchases are:

• Questrade
• Virtual Brokers

The offer from National Bank Direct Brokerage is slightly different in that it allows for unlimited commission-free ETF buying and selling but only of Canadian ETFs and only for a limited amount of time.   Although commission-free ETF trading at National Bank Direct Brokerage is currently part of a promotional offer, depending on the response they receive from prospective clients, their promotion could turn into a standing offer in the future.

Whatever the model being used, it is clear that with any ETF commission deal from the Canadian discount brokerages, there are certain strings attached. For self-directed investors, it is important to understand the terms and conditions attached to the ETF commission pricing and be vigilant about the strings that come attached to these offers.

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.