What's the catch with No-Fee Exchange Traded Funds (ETFs)

There are other costs to consider besides Transaction Costs

My friend Sheyna Steiner over at Bankrate.com wrote an excellent article about No-Fee ETFs.  These are funds that can be traded without transaction costs.  The transaction cost is the amount you need to pay to buy or sell the fund. For example Scottrade charges $7/trade, Charles Schwab charges $8.95/trade, and E-Trade charges $7.99/trade .  While avoiding costs is always a good thing there are other factors to consider - I was able to help her out with some thoughts on these unique investments.

“There could be liquidity concerns for some of the ETFs if they don’t trade a lot of shares every day.”

”When you go to buy them, you are not paying the transaction cost, but you are paying the bid-ask spread. And you may be paying up if there aren’t a lot of shares being traded that day.”

I gave an example to show how a bid/ask spread could become very expensive for you.

“He points to the WisdomTree Global Natural Resources ETF on E-Trade, with a recent spread of 5.25 percent. At the time, the last price listed was $21.37 with a bid of $20.40 and ask of $21.50. “If you purchased it at the market, you would pay $21.50 per share. If you sold at the market, you would receive $20.40,” Christenson says. The bid-ask spread of that ETF subsequently widened.”

Ultimately, the investments are only the tool for accomplishing your goals. If you can save on costs all the better, but you should place greater emphasis on your plan.

“Come up with your investment plan first and then find the best investment vehicle. Don’t plan your portfolio around no-cost ETFs.”

I recommend you read the full article here. It was also picked up by Fox Business. There is a lot of other good information worth checking out!

Or check out our earlier article of the full cost of investing in exchange traded funds and mutual funds to better understand your total costs of investing in any mutual fund or exchange traded funds (ETF).