UPDATE: TD Ameritrade Launches Over 100 Commission Free ETFs

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

Morningstar (NASDAQ:MORN)
Historical Stock Chart
From Jun 2024 to Jul 2024