Vanguard Brokerage Services To Offer Free ETF Trades

On May 4, 2010 the Vanguard Group announced a dramatically new pricing plan for its Vanguard Brokerage Services wing, which until now had been incredibly uncompetitive and was recommended by almost nobody.  In a move to become more competitive with online discount brokers such as Tradeking and Zecco, Vanguard has slashed its transaction fees from $20+ to as low as $2 (or free for investors with large account balances, see chart below for all the confusing details).  The Pièce de résistance, however, is what Vanguard has done for Vanguard ETF trades.

Trading Vanguard ETFs Is Now Free

That’s right, Vanguard Brokerage Services customers now get unlimited free trades of Vanguard Exchange Traded Funds (ETFs), a major boon for broad-market index ETF investors (which you should be).  Why is this such a big deal?  Because not only does Vanguard have some of the best index funds around,it offers ETF share classes of most of its index offerings with even lower expense ratios.  Note that this change applies only to Vanguard ETFs.  All non-Vanguard ETF trades will be charged the regular (albeit reduced) commission.

Are Index Funds Dead?

Is this the final nail in the coffin for index funds in favor of Exchange Traded Funds?  Not necessarily.  While Vanguard offers ETFs in most asset classes, it is still decidedly lacking in some of the more exotic asset classes such as emerging market small-cap value  and developed market small-cap value.  Thus, there will still be a need for the Dimensional Fund Advisors of the world, which unfortunately still doesn’t offer anything in the ETF realm.

The vast majority of investors, however, probably have no more reason to own index funds over ETFs.  The major argument before was that the transaction costs of buying ETFs would wipe out any cost savings for all but investors with the very largest accounts.  With the proliferation of free ETF trades (Vanguard isn’t the only one), that argument seems to be losing steam.  Sure, there are still bid-ask price discrepancies ETF investors have to contend with and it’s also true that ETFs often trade slightly above or below their actual Net Asset Value, but these are minor concerns for all but the most thinly-traded ETFs.

That said, I wouldn’t go closing your Tradeking account just yet.  Vanguard Brokerage Services doesn’t have the best of reputations, and I’ve heard their customer support is downright dreadful at times.  Still, it’s a step in the right direction.  Bogleheads who would prefer to keep all their assets at Vanguard can now do so without having to pay abnormally large commissions for mediocre service.

Vanguard Brokerage Services Commission Chart

accurate May 4, 2010, trade limits are on an annual basis

Assets Investing In Vanguard Funds And ETFs	Commissions For Vanguard ETFs	Commissions For Non-Vanguard ETFs And Stocks
Less Than $50,000	Free	$7 for first 25 trades ($20 thereafter)
$50,000-$500,000	Free	$7
$500,000-$1,000,000	Free	$2
$1,000,000+	Free	Free for first 25 trades ($2 thereafter)