UPDATE: TD Ameritrade Launches Over 100 Commission Free ETFs
October 08 2010 - 11:01AM
Dow Jones News
TD Ameritrade Holding Corp. (AMTD) announced the launch of over
100 commission-free exchange-traded funds, heating up competition
with rivals including Charles Schwab Corp. (SCHW), which took
similar steps beginning last year.
The Omaha, Neb. online brokerage said the ETFs will be available
to both retail investors and independent registered investment
advisers. ETFs, which trade like stocks, have gained in popularity
in recent years as the investment tools track a particular index,
sector, industry or even commodity.
The commission-free ETF announcement underscores a broader
pricing war among online brokerages. Last year, Schwab, E*Trade
Financial Corp. (ETFC) and Fidelity Investments all cut their
trading commissions. TD Ameritrade has said it has no plans to
change its flat fee of $9.99 per trade for all customers.
Pricing battles are also prominent in the ETF space, with
Schwab, Vanguard Group, and Fidelity all offering some degree of
commission-free trades in an effort to capture market share.
Ameritrade's ETFs aren't proprietary, but the company offers a
list of ETFs from well-known providers including Vanguard Group.
The ETFs are selected by investment consultants at Morningstar
Associates, a registered investment adviser and unit of Morningstar
Inc. (MORN).
In an interview with Dow Jones Newswires, TD Ameritrade Chief
Executive Fred Tomczyk said "one of the things that we know we're
good at is bringing products that are primarily
institutionally-oriented to retail clients."
While Tomczyk said 70% of ETFs are held at institutions, he
believes Ameritrade can expand those products to long-term
investors and come up with a "much better approach."
TD Ameritrade's ETF assets are less than 10% of its total
assets, according to a company spokeswoman. The company first made
ETFs available to retail investors in 2004.
Ameritrade's commission free offering doesn't include leveraged
ETFs, which use derivatives to amplify the returns of a market
index.
Tomczyk said TD Ameritrade won't receive any fees from ETF
manufacturers or asset managers to compensate the firm for the
commission free products.
If investors elect to trade out of the ETFs within 30 days,
Tomczyk said the customers would be charged a $19.99 fee, but noted
that such a fee "works very similar to how an index mutual fund
operates."
In a note to clients, Credit Suisse Group analyst Howard Chen
said he believes the ETF announcement would have a minimal impact
on TD Ameritrade's earnings.
He estimated ETF trading represents roughly 12% to 13% of TD
Ameritrade's trading volumes and roughly $80 million of its
commissions.
For Ameritrade, Chen projected that leveraged ETFs account for
roughly half of its ETF-related volumes/revenues, adding that
because those tools aren't included in the new offering, he says
only roughly $10 million, or half of a penny of earnings, of
commission revenues would be at risk.
ETFs are considered a growth market for online brokers. In
August, Charles Schwab said it would pay $150 million in cash and
stock to purchase Windward Investment Management Inc., an
investment advisory firm, to broaden its push into ETFs. As of July
30, Schwab had $1.4 billion in eight proprietary ETFs and launched
three additional ones that month.
Shares of TD Ameritrade recently traded down 11 cents at $16.30.
The company's stock is down 19% over the past 12 months.
-By Brett Philbin, Dow Jones Newswires; 212-416-2173;
brett.philbin@dowjones.com
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