ETFs' Free Trade Boost

The emergence of free online trading could have a huge impact on the exchange-traded fund industry.

A few weeks ago, Zecco Holdings announced it was launching zero-commission online trades. Shortly after that, Bank of America(BAC Quote) said it was going to offer the same thing to customers with a combined $25,000 or more in their Bank of America accounts, including checking and savings accounts and CDs.

This could be a major boon for ETFs, because while they're constantly praised for their low annual expenses, transparency, tax efficiency and flexibility, investors have had to pay commissions to buy and sell them. This has alienated a large pool of people, particularly those who prefer to invest in small, regular increments and would get slammed paying $10 a pop in commissions.

"The commission costs were the last major wall separating ETFs and index funds," says Matthew Hougan, editor of indexing industry Web site IndexUniverse.com.

"ETFs are a fraction of the broader mutual fund industry ... absent brokerage fees, ETFs are a better structure in many ways. I don't think many people argue about that anymore," he says.