ETF Tuesday

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ETFs' Free Trade Boost

10/24/06 - 09:15 AM EDT

BAC

Jen Ryan

"No commissions does not equate to no costs," says Roth. ETFs, like stocks, have spreads between the bid and the ask price, so even if there are no brokerage fees, investors will have to pay the spread.

Also, unlike buying index mutual funds, where you can invest a specific dollar amount and receive fractional shares, ETFs have to be purchased in whole numbers of shares. For example, if you wanted to invest the sum of $1,000, you could do so with a mutual fund. But with ETFs, you would have to purchase a certain number of shares based on the price at which they are trading.

Finally, Roth warns investors to be mindful that, "There is no free lunch."

With the absence of commissions, Roth says, "Bank of America and other institutions offering 'free' trades expect to make money from the customer in other ways."

Hougan echoes the last point, saying, "Free does cost something." In this case, it's evident in the interest rates, he says.

The interest rates for Bank of America's money markets savings account and CDs are below industry standards, Hougan says. So this may not be a good deal for customers, as it could substantially reduce their yearly deposit income.

Hougan adds a final point: "ETFs are supposed to be long-term investments," so investors should also be reminded that "just because trading is free doesn't mean you should do it."

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