TD Says Goodbye to Commission-Free Vanguard ETFs
Written by David Fabian, October 17th, 2017
TD Ameritrade roiled the investment community this week when it announced it was shaking up its commission-free ETF lineup across its entire brokerage platform. The highlights include an expanded number of funds available to trade and fewer restrictions on eligible accounts. They also dropped Morningstar as the advisor that selects the commission-free list, giving in-house management more control over which funds make the cut.
This type of expansive announcement is typically met with great enthusiasm by the advisor community. However, the biggest bombshell is that they are no longer offering Vanguard ETFs on their commission-free list. Yeah, you heard me right…NO VANGUARD.
Many consider it an unpardonable sin in this day and age to omit Vanguard from your preferred vendor list. It’s just not done under any circumstances and likely has many professionals thinking about how they are going to spin this angle to their clients.
This decision was likely due to a strategic business edict. Brokerage companies strike deals with certain fund companies to cover marketing costs and participate in revenue sharing models. Vanguard clearly didn’t fit into the picture, didn’t want to participate, or was excluded based on competitive reasons.
The important thing to remember is that Vanguard is the face of the index-fund movement, but they are not the only game in town. There are many solid fund providers out there that offer identical offerings at the same or cheaper expense ratios. You may not get every single index flavor that you had previously, but I would bet that you can find some very solid replacements in the new ETF list.
Headlining that list is a lineup of broad-based “portfolio” funds from State Street (the SPDR brand) that have extremely minimal expenses. All the traditional market cap and sector segments are represented, in addition to a few funds that you may not have known existed. It’s worth combing through some of these fresh faces to see how they match up to some of the funds you currently own.
My biggest concern with the SPDR portfolio series is the relatively light trading volume. Advisors who trade in size need to ensure they are using limit orders to get rock solid pricing. It’s likely that the natural pull of assets and attention to these funds will gradually ramp this up over time, but for now, it’s going to be a small risk factor that must be managed.
The good news is that there is still a strong BlackRock (iShares) presence in the new list that contains well-known factor ETFs based on quality, momentum, volatility, and international indexes. These can be used for both core or tactical exposure depending on your investment style and have established asset bases with strong liquidity pools.
New to the commission-free platform are the big smart beta players from the likes of WisdomTree, First Trust, JP Morgan, PowerShares, and ProShares. This is where things start to get a little murky for me.
You must be extremely discerning in evaluating the efficacy of these more complex fund strategies. They generally come with higher embedded fees, more concentrated portfolios, and varying risk dynamics than more simplistic index funds. Some can be truly fantastic, but you must weed through a wall of nonsense to find the diamonds in the rough.
The Bottom Line
TD Ameritrade touts nearly 300 funds on the new commission-free list. But let’s be realistic, there are probably 100 good funds and 200 that would make my “never trade” list. Two-thirds can be thrown in the incinerator and you would not miss them.
The loss of Vanguard is conspicuous, but a bug that can be easily overcome with a little creativity on the part of your portfolio manager (even if that is you). Additionally, if you are so in love with Vanguard that you MUST own their funds, just pay the $6.95 trading fee. They haven’t been banished into permanent exile. They just aren’t free to trade at TD Ameritrade starting in November.
Rather than bemoan the decision makers behind this change, I am opting to focus on the fresh opportunities that are being presented to us. Looking at this from a glass-half-full standpoint will ensure I’m ready to make the right trades with the right tools when the timing presents itself. I urge you to do the same.