Commission-Free ETFs at Canadian Discount Brokerages: A Clever Lure or a Good Deal for Investors? Part 1

Why Discount Brokerages Have Gone Commission-Free

The freedom to trade ETFs as one would trade a stock has also meant that, like stocks, trades are subject to regular trading commissions from discount brokerages.  With the ability to trade in so many different ways, both active and passive investors can trade these instruments to suit their particular needs and strategies. For discount brokerages, the popularity of ETFs with investors has meant another possible revenue boost from trading commissions these instruments would generate.

In 2011, that strategy for discount brokerages was upset. In that year Scotia iTrade significantly raised the stakes for other discount brokerages in Canada by offering commission-free ETF trading to investors. It wasn’t too long before the competitive nature of the discount brokerage industry forced others to join in, including Qtrade and Virtual Brokers.

Fast forward to 2013 and there are (at the time of writing this piece) five Canadian discount brokerages who offer commission-free ETF trading of one type or another. They include:

One of the obvious questions that comes to mind is: “why, in the face of such popularity with investors, would any discount brokerage offer ETFs to investors commission-free?”

The answer seems to have more to do with the competitive ETF landscape rather than any warm & fuzzy feelings discount brokerages may have towards their clients.

The cutthroat world of ETF providers has become so incredibly competitive that in order to encourage investors to choose particular funds, ETF providers are willing to pay marketing fees to the discount brokerages to attract the volume of investor capital that is critical to their business model.

On the surface, the alliance between the ETF providers and discount brokerages seems sensible, at least in certain cases. The former makes more money with larger assets under management whereas the latter could receive more predictable revenues from marketing fees than from investors deciding to trade or not.

Ultimately, both the discount brokerages and ETF providers still have to make money which explains why the most popular ETFs still have to be paid for in some fashion and why those that are commission free to buy and sell aren’t necessarily the ones investors seek out the most.

In the next part of this series, we dive into what kinds of commission-free ETF choices are currently offered by discount brokerages as well as several tips for investors considering these features as part of choosing a discount brokerage.

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