Vanguard Will Offer Commission-Free Trades on All ETFs (Including iShares, Fidelity, Schwab, Etc)

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Vanguard made a splash last week when it announced that it will offer commission-free trades on all ETFs in it brokerage accounts. Vanguard ETFs had been free to trade already. Starting in August, they will add nearly 1,800 ETFs from competitors including Blackrock (iShares), Schwab, State Street (SPDR), Powershares, WisdomTree, etc. Also see WSJ article (paywall?).

Pros. It is now cheaper to keep all my assets in only Vanguard accounts. In the past, if I wanted to buy a WisdomTree ETF, I might have held it in external account for cheaper trades. I could buy a Schwab ETF if that flavor is a lot cheaper. I could do some tax-loss harvesting in the same account. Simplicity and convenience are good. (Although, some would argue that it isn’t a bad idea to spread your money across different brokerage custodians.)

This is a bold move meant to disrupt the more limited commission-free ETF lists from other providers including TD Ameritrade, Schwab, and Fidelity. None of their lists include Vanguard ETFs, yet now Vanguard will include all of them. How will this change the competitive landscape? Will others move to match this “deal”?

Cons. Basically… who’s paying for this? Vanguard is known historically for being the “at cost” choice. They paid their employees, did their work, and then charged you what it cost to run the fund. There was no extra profit component for public or private shareholders. You had confidence that when they lowered their expense ratios, that would be a long-term move. Vanguard has never given out big sign-up bonuses or paid for the naming rights of “Vanguard Arena”.

However, in my opinion this move brings them closer to their competitors where they lose money on marketing and promotions and then have to cover that cost by charging a little extra on other things. Vanguard has already increased their ad budget significantly in recent years. I estimate the cost of a stock trade at about $2 per trade. That’s close to what the leanest, high-volume competitors charge when they can’t offset the trade costs with other revenue sources. So basically Vanguard is “paying” $2 a trade and hopefully offsetting that cost somewhere else. This must add up (especially for active traders), otherwise Schwab or TD Ameritrade would have already offer it. Instead, they charge for access to their no-transaction-free platforms.

As a supposed “owner-investor” in Vanguard, I was never asked my opinion on this. Vanguard is basically saying that growth of assets is good for everyone, don’t worry that the money to pay for these trades has to come from your Vanguard ETF and mutual fund holdings. As long as expense ratios only go downward, I suspect nobody will push back too hard.

Vanguard is also heavily pushing their Personal Advisory Services (PAS) at 0.30% of assets. How does the money flow between PAS and their ETFs? If PAS makes more money, does it help lower the expense ratios on my Total Stock Market ETF shares? It’s not very transparent.

In the end, you have to trust that Vanguard is still working for the good of their investors, and not just growing and accumulating a lot of well-paid executives and management. (Owner-investors also don’t know anyone’s salary at Vanguard.) As someone who has seen this sort of more-more-more philosophy in “non-profit” healthcare institutions, I am a little worried. I hope I’m wrong, and this move won’t cost Vanguard investors very much while making ETFs cheaper overall.

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  1. Hi Jonathan,

    A couple thoughts:

    Firstly, “I estimate the cost of a stock trade at about $2 per trade. ” Can you unpack where your estimate comes from? Is that a static number? Is it possible Vanguard’s size/emerging technologies has allowed them to find a way to significantly lower that cost?

    Secondly, I’m in agreement with the sentiment of your post. Further, as an owner-investor the thing that I’d really like Vanguard to do is to further lower their minimums for Admiral. For reasons that you’ve highlighted over the years, ETFs are (to many investors, including me) sort of a pain in the rear compared to mutual funds. I want to tax-loss harvest so I use Schwab for my taxable account, which also necessitates some ETFs but fewer.


    • Just an observation. Out of the very lean brokers with minimal bell and whistles (and customer service) that have a flat pricing and have been able to hold their prices stable, the lowest commission costs average about $2.50 to $3 a trade. Interactive Brokers, MB Trading, JustTrade, SogoTrading, and so on. Anything lower either doesn’t last or is otherwise subsidized. Robinhood is free but not profitable (burning through start-up capital for growth). Merrill Edge has minimum asset requirements and requires a Bank of America cross-selling relationship that earns them money from bank accounts and credit cards. All of the other “commission-free” ETF supermarkets out there are “pay to play” where the ETF sponsor pays to be on the platform, essentially subsidizing the commission costs.

  2. My understanding is that the ETF sponsors actually pay the custodian to be included on their no transaction fee list (thus offsetting or eliminating the cost to the custodian). Vanguard is eating everyone’s lunch and gaining assets hand over fist so they presumably have pretty good leverage over the ETF sponsors who figure that if they can’t beat Vanguard they might as well join them. The counter observation would be that TD Ameritrade just ended their best in class free ETF program, so it’s clearly not free to the custodian. My guess is that including lesser known ETFs on the list will help pay for the best in class ETFs to be offered and Vanguard will roughly break even at least for as long as it lasts.

    • I would be very very surprised if Blackrock or Schwab agreed to pay Vanguard for placement. Vanguard is letting basically every ETF trade free, no matter which sponsor. I just wonder if they will limit active traders in some regard.

  3. Valid point. There will always be people willing to exploit such provisions and spoil it for everyone.

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