NEW YORK (TheStreet) -- Vanguard, which has made its mark in the ETF and broad financial realm by offering some of the lowest priced financial products around, raised the bar this week when it unveiled a plan to offer commission-free trading on any of its 46 Exchange traded funds for brokerage clients.It is the third company to slash trade commission fees on ETF products since the end of 2009. Cutting commission fees as a marketing plan started when Charles Schwab ( SCHW) used it to make a new line of ETFs attractive to its customers against products from larger, more established competitors such as State Street and iShares. The move quickly paid off when, after only five months after they were launched, Schwab's ETF suite surpassed $1 billion in assets. Soon after, Fidelity followed Schwab's lead by offering commission free trading for 25 of the most popular iShares ETFs. With Vanguard now joining the fray and slashing its own trading commission fees, it is evident that this idea, which began as a marketing strategy, is fast becoming commonplace among top brokerage firms. Just days after Vanguard announced their plan, Scott Burns, director of ETF analysis at Morningstar predicted that State Street's SPDRs will be the next line of funds to have their commission fees axed. Slashing commission fees is a good way for companies like Vanguard to hold onto clients and also provide dedicated Vanguard investors with an even cheaper trading experience. However, in the longer term, this move may prove detrimental to the overall diversity of the ETF arena, ultimately leaving investors with fewer options to choose from. In the past, any new ETF providers could gain a footing in the ETF industry by offering customers unique and exciting new products. Big players like State Street and iShares have been able to dominate the ETF industry because they were first movers or large enough to offer lower expense ratios. Smaller boutique ETF providers such as Claymore and WisdomTree, on the other hand, have had to win over fans and draw in assets by offering exposure to new and unique market slices bypassed by other firms.
The nature of the ETF industry has lead smaller firms to introduce unique products such as the Claymore/Arca Airline ETF ( FAA), the Claymore/MAC Global Solar Energy Index ETF ( TAN), the WisdomTree Dreyfus Emerging Currency Fund ( CEW) and the WisdomTree India Earnings Portfolio ( EPI). Decisions by dominant players such as Vanguard and Fidelity to slash fees on specific products could compromise these smaller ETF providers' ability to compete if the large brokers begin to offer competing products. Right now, the greater risk is than investors may limit themselves to a single ETF provider. Over the nearly two decades that ETFs have been in existence, close to 1,000 different funds have been launched, proving investors with a plethora of opportunities to expand their portfolios into facets of the market previously unreachable. However, with brokerage firms now starting to adapt commission-free plans to keep customers in-home, the possibility of pigeon-holing an investment strategy becomes greater. As the cost of trading plummets, trading fees become an increasingly smaller share of costs. For small investors who make a lot of trades, it can still be hefty, but all in all, this is a shallow moat that investors should be willing to cross. -- Written by Don Dion in Williamstown, Mass.