By Sarah Krouse 

The cost to trade stocks and exchange-traded funds online is plummeting as two online brokerage giants slashed commissions Tuesday.

Hours after Fidelity Investments released plans to lower online trade commissions on U.S. stocks and exchange-traded funds to $4.95 from $7.95, Charles Schwab Corp. volleyed back, matching that price. Schwab already cut its online trade commissions for U.S. stocks and ETFs earlier this month to $6.95 from $8.95. The firm also matched Fidelity's option pricing at 65 cents per contract.

Shares in Schwab dropped 3% in early trading Tuesday, while TD Ameritrade Holding Corp. and E*Trade Financial Corp. stock was down 6.5% and 5.4%, respectively.

TD Ameritrade and E*Trade, two other brokerages that stoked a prior price war as online brokerages boomed in the late 1990s, charge $9.99 per online stock trade.

Dueling price cuts are a way for brokerages to capture growing sums of money flowing into ETFs, lower-cost products that track the performance of a basket of securities but trade on exchanges like stocks. Assets in U.S. ETFs surged to $2.5 trillion at the end of last year from $938 billion five years earlier, according to consulting firm ETFGI LLP. Schwab, Fidelity and other large brokerage firms also offer commission-free trading for a number of ETFs.

Asset-management firms that provide the funds brokerages sell have been equally aggressive about pulling down fees. In some cases, that means the cost of investing is tumbling toward zero. By the end of 2015, the most recent year for which data are available, 348 mutual funds and ETFs tracked by Morningstar Inc. charged investors 0.1% or less, up from 125 such funds five years earlier.

Fidelity has a large money- management business as well as a brokerage business.

There have been earlier attempts to bring down trading commissions across the industry. In 2010, Schwab cut the cost of trading stocks and some ETFs to $8.95 from $12.95 for many customers, and E*Trade scrapped a $12.99 per stock commission tier in favor of a baseline $9.99. Fidelity in 2010 got rid of tiered pricing for U.S. equity trades, charging all customers $7.95 instead of $8, $10.95 and $19.95.

When Schwab reduced its standard online commissions again earlier this month, some industry analysts speculated that it could trigger another round of cuts.

Fidelity's online price cuts weren't in response to any one competitor, said Ram Subramaniam, president of Fidelity's retail brokerage business, but was a "big and dramatic" change and a "long-term move for us."

The firm, with 17.9 million customer accounts, has tried in recent years to woo millennials through improved mobile applications and debt-management services, and the cuts are partly a way to attract more younger investors. Fidelity has also tried to more aggressively attract fresh cash from investors through fund fee cuts and other incentives.

The moves will mean less revenue for Fidelity, the retail brokerage president said. That amount, he added, is "dozens of millions of dollars."

Schwab Chief Executive Officer Walt Bettinger said that "we never want commission costs to be a barrier for investors" in choosing where to put their money.

Write to Sarah Krouse at sarah.krouse@wsj.com

 

(END) Dow Jones Newswires

February 28, 2017 10:59 ET (15:59 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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