Vanguard ups competition, offers free ETF trades

Vanguard on Tuesday expanded its push into the exchange-traded fund business by offering commission-free ETF trades, and undercut rivals by slashing its brokerage clients' stock trading costs to no more than $7.

The moves come three months after Fidelity Investments cut its online stock trading commission to a flat fee of $7.95, while also eliminating commissions for trades in 25 ETFs offered by iShares. Charles Schwab Corp. made the first move in the latest round of trading cost cuts by offering $8.95 stock trades in January, and it also recently dropped commissions for its core lineup of eight ETFs.

Vanguard helped usher in an era of low-cost investing with its introduction of index mutual funds in the 1970s, and it remains best known for those alternatives to pricier actively managed funds. But it also has helped fuel the more recent growth of ETFs, which are enjoying far faster growth than traditional funds.

Vanguard is the No. 3 ETF provider behind iShares and State Street Global Advisors, and has seen assets in its 46 ETFs more than double over the past year to over $100 billion.

Tuesday's announcement of commission-free trades in those in-house ETFs signals Vanguard is prepared to carve out a bigger piece of the business, while also expanding brokerage operations that currently are smaller than those of Fidelity, Schwab and other rivals. Vanguard's commission-free ETF lineup now dwarfs those of Fidelity and Schwab.

"They've made peace with ETFs, and they are not going to let this part of the market get away," Forrester Research analyst Bill Doyle said.

ETFs are baskets of stocks, bonds or commodities that differ from mutual funds because they can be traded like stocks during daily trading sessions. Mutual funds are only priced once a day.

Critics of ETFs - including Vanguard's retired founder, John Bogle - have said that ease of trading encourages some investors to make ill-advised attempts to time the markets by moving in and out too frequently. Vanguard acknowledged such concerns Tuesday.

"To be clear, our commission-free offer is not intended to encourage the active trading of ETFs, which we believe is counterproductive and rarely successful," said Bill McNabb, CEO of privately held Vanguard, based in Valley Forge, Pa. "Rather, it enables investors to construct a balanced, long-term portfolio of low-cost Vanguard ETFs and add to the portfolio regularly."

Vanguard said it continues to back traditional buy-and-hold investing.

"If you're a day trader or hyperactive trader, we're not going to be a great place for you because our Website isn't designed for that," said Colin Kelton, a principal in Vanguard's retail group.

Another criticism of ETFs are the trading commissions that investors can rack up compared with mutual funds, especially no-load funds without upfront sales charges. But that criticism may wither as more commission-free ETFs become available.

"We're putting our ETFs on the same footing as our mutual funds," Kelton said.

Despite their recent growth, ETFs are still a long way from catching up with mutual funds. U.S. ETF assets stood at nearly $679 billion at the end of February, compared with nearly $11 trillion in mutual funds.

But the emergence of no-commission ETFs is a big competitive threat.

"If there is a party in the industry that should be alarmed, it is the traditional mutual fund management and distribution firm," said Doug Dannemiller, an Aite Group analyst. "ETFs are set to continue to gain share."

Clients wishing to trade other providers' ETFs through Vanguard's brokerage business will pay the same trading commissions as the new reduced rates for stock trades. The no-commission ETF trades and reduced rates for stock transactions apply to trades made through the company's Website, as well as those made with assistance from a Vanguard brokerage representative.

Most Vanguard investors previously were charged anywhere from $12 to $45 for stock and ETF trades.

For Vanguard brokerage clients with less than $50,000 invested in Vanguard funds and ETFs, stock trades will now cost $7 apiece for the first 25 transactions in a calendar year. Investors with $50,000 to $500,000 invested can make unlimited $7 stock trades, while those with $500,000 to $1 million can make unlimited stock trades for just $2. Trades are free - up to an annual limit of 25 transactions - for those investing $1 million or more.

The free trades involving Vanguard ETFs apply to all Vanguard brokerage clients. Those with less than $50,000 invested pay a $20 annual service fee to maintain a brokerage account. The fee is waived for bigger investors.

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AP Personal Finance Editor Trevor Delaney contributed to this report from New York.