Mainstream Free Stock & ETF Trading is Here to Stay. Does it Matter?

It seems like every 6 months or so there is big financial investment industry news that is reflective of the industry race to the bottom on price. Well, here we go again with a big one. Schwab is now offering $0 commission online stock, ETF, and options trades.

The last few years have seen a big shift to lower cost and commission-free funds across many of the big investment brokers. Here are just a few examples of this trend:

  1. Vanguard lowered fees across all funds
  2. Fidelity launched zero-cost index funds & slashed fees
  3. Vanguard increased commission-free ETF trading to 1,800+ ETFs
  4. Fidelity increased commission-free ETF trading to 500+ ETFs (Schwab did the same on the same day)

Even with all of these changes, I was skeptical we’d get to the point where major investment brokers offered free stock and ETF trading.

Those who have been investing for the last decade-plus may remember Zecco entering the $0 stock trading arena, realizing it wasn’t a viable business model for them after a few years, infuriating customers by adding trading fees, and then being bought out by TradeKing (which was later bought by Ally Bank and re-branded as Ally Invest).

schwab free trades

Since then, a few players have offered a limited number of free equity trades per month if you jumped through certain hoops (e.g. having a large minimum account balance, or having various other financial relationships with their bank).

When Robinhood Markets entered the investment scene promising the same, back in 2013, I thought it would see a similar fate as Zecco. 6 years and 6 million+ accounts later, it hasn’t (though being bought out by a larger competitor is almost surely their end goal).

Schwab making this move to offer free online stock and ETF trading for all customers, as the 3rd largest investment firm (behind only Fidelity and Vanguard) with over $3 trillion in customer assets, is much more impactful than a new entrant doing the same. Schwab is a market mover. When it does something, all of the other big players pay attention and often follow suit. In fact, within 24 hours after the announcement, TD Ameritrade’s stock fell 22%, and it announced it would also be offering the same.

Update: Fidelity, Ally Invest, and ETrade have since made the move to free stock trading.

Mainstream free stock & ETF trading is here. I expect that it’s only a matter of time before the remaining broker holdouts follow suit.

Should Free Trading Change your Investment Behavior?

Does this change matter? And should it have any impact on how you invest? While this move is a positive for investors in that it continues the lower cost trend, it won’t change my investment behavior and it probably shouldn’t change yours either. I’m actually a tad bit concerned that this could create some bad habits. Let me explain…

1. Most amateur investors shouldn’t touch stocks and options

If you’ve been following this site, you are probably aware that I am a fan of passive investing in index funds and ETFs. It’s boring, but incredibly effective. Market timing by trading in and out of stocks is a fool’s game – one that I participated in many years ago and much more often that not, got burned by. And trying to pick winner and loser stocks is also a fool’s game. I worry that this trend could inspire poor investing trading habits in amateurs.

2. ETFs and index funds were mostly free already

This trend does help ensure that more index funds are available through more brokerages without commissions, but there were already plenty of commission-free ETFs out there at many different brokerages that are very suitable for most investors. Index/mutual fund choices at your brokerage are more important than free stock trades. And for the record, I treat ETFs the same as I treat index/mutual funds – as passive investment vehicles with low fees.

3. It’s all about the expense ratios

If you passively invest, you likely already have been doing commission-free investing. The focus then becomes the comparative expense ratios of the funds that you invest in – where even a small tenth-of-a-percent difference in cost can equate to thousands of dollars over your lifetime.

In my mind, seeing more zero expense ratio funds is significantly more important to passive investors than seeing no commission fees on trades.


Will free stock, ETF, and options trading change how you invest? Why or why not?

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