Commission-Free ETFs: Peer Pressure?

Letting self-directed investors trade exchange traded funds (ETFs) commission-free appears to be all the rage amongst Canadian discount brokerages these days.

National Bank Direct Brokerage has now become the latest Canadian discount brokerage to offer free trading of Canadian ETFs (click here to read their press release) joining the likes of Questrade, Qtrade, Scotia iTrade and Virtual Brokers in offering some kind of free ETF trading.  Specifically, National Bank Direct Brokerage is offering three months of commission-free trading of Canadian ETFs for new and existing clients.

Commission-free ETF trading offers, while great for self-directed investors, require individuals to really understand the terms and conditions that come attached to these types of offers.

The Fine Print

While they’ve done a good job of keeping the terms and conditions easy to read (there are only 17 conditions), there are a couple of important conditions attached to this ETF offer by National Bank Direct Brokerage that self-directed investors need to pay attention to.

First, the promotion applies only to Canadian ETFs (unlike other discount brokerages which do not restrict the ETFs to Canadian only).  What exactly is a “Canadian” ETF? According to National Bank Direct Brokerage, the “Canadian” refers to any ETF that comes from a Canadian provider (e.g. Barclays, BMO, First Asset, Horizons, Invesco Powershares, iShares Canada, RBC and Vanguard Canada).

Second, the ETFs must be held for at least one trading day otherwise regular trading fees apply. This means that at an ETF could be purchased before closing on one trading day and then traded the following trading day without a fee. Thus, hold period is measured in trading days.

Third, trades must be at least $5000 in value in order to qualify for the commission rebate.

Lastly, according to the terms and conditions, clients must pay for the commissions on any ETF transaction at the time of purchase and they will then be reimbursed “six months after the promotion ends” (FYI: the promotion ends on July 31, 2013).  The terms go on to clarify the actual refund date by stating that trades placed between April 15^th and June 14^th will be reimbursed on October 18^th whereas trades placed between June 15^th and July 31^st 2013 will be refunded on December 20^th.   For a list of their commission rates, check our profile of National Bank Direct Brokerage here.

On the plus side, the offer allows for unlimited commission-free ETF trading (buys and sells) for three months after signing up for this account. For occasional investors or those who rebalance, this may not be a tempting offer, however for swing traders or those who have hold times for trades that are days or weeks (rather than hours or months), this offering could be attractive, especially since there are no caps to the numbers of trades that could be made.

While the timeframe to get reimbursed is lengthy, it is in line with many ‘cash back’ offerings currently available at other discount brokerages.  Some tips for self-directed investors considering this offer are to make sure they keep good records of their trading activity and to have a conversation with an accountant or tax advisor to ensure proper tracking of the commission costs and rebates.

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Why only Canadian ETFs and why only for a limited time?

Given the diversity of offerings of Canadian ETFs, there is certainly a healthy selection of possible investments to choose from (over 250) covering different sectors, strategies and asset classes.

In an environment where other Canadian discount brokerages are offering access to popular US based ETFs as a standard part of their packages, we were curious as to what prompted National Bank Direct Brokerage to structure this promotion in the way they did.

To help us answer those questions, we asked two representatives from National Bank Direct Brokerage, Nancy Paquet, President, and Martin Gagnon, Senior Vice President of Wealth Management about the decision to focus on Canadian ETFs and why they chose a short period for this offer.

Clients buy Canadian

According to Gagnon, part of the decision to provide commission free trading to Canadian ETFs was prompted by the preferences of many of National Bank Direct Brokerage’s clients.  While some clients do trade US ETFs, a larger number prefer Canadian ETFs.

When asked about the competition’s offering in the ETF space, Gagnon pointed out that this is “one of the most aggressive” ETF offers currently available because clients are allowed to buy and sell all Canadian ETFs.  While we won’t analyze their offering in detail here, the table below provides a quick comparison of the other discount brokerages offering commission-free ETF trading.

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

The strength of this offering is that it strikes a balance between access and cost.  On the one hand buying and selling are commission free (once the trade commission is reimbursed) for three months.  On the other, there is a relatively high minimum order size.  For medium to larger portfolios, however, the minimum order size may not be an issue.

While pricing and selection are certainly components to consider, Paquet also highlighted the support National Bank Direct Brokerage provides around ETFs. Products such as ETF research reports (prepared by National Bank’s Director of ETF Research & Strategy, Pat Chiefalo), seminars to orient investors on ETFS and a dedicated ETF research section online are extras this discount brokerage hopes self-directed investors consider when looking at their offering.

In terms of the three month time frame of the offer, Gagnon mentioned that providing an ETF-focused offering has been in the works for some time. This offer, while time limited, will give National Bank Direct Brokerage the opportunity to assess how they would like to build out their ETF offering to clients at the end of this promotion.

The Bottom Line

Given the competitive landscape for discount brokerages in Canada, National Bank Direct Brokerage’s offering is certainly an attempt to keep pace with other discount brokerages offering commission-free ETFs.  The diversity of Canadian ETFs currently available means that there are many different types of investing strategies that can be supported by the ETFs now on the Canadian market.  An added benefit of using the Canadian ETFs is the currency hedged exposure to major US indices and the increased competition that is keeping management fees low.

The structure and timing of this promotion mean that existing clients may find it more appealing than new clients even if it is for a limited time. If this promotion generates enough interest, however, the commission-free ETF club may just have to make room for one more.