For years, ETF issuers liked to claim that their products were bought not sold, but that mantra no longer holds for a market of more than 2,200 listed products in the U.S.
Now brokerage firms are expanding the power of their platforms by striking further deals with ETF issuers to offer their products commission-free. Though the terms are not disclosed on an issuer-by-issuer basis, the deals usually include a set-up fee and a percentage of assets in the commission-free products on the brokerage platform. These fees are paid by the manager, not by the fund.
The power of the commission-free supermarket focused on advisers was first tested by TD Ameritrade Inc. in October 2010. Earlier that year, Fidelity entered into an exclusive partnership with iShares by BlackRock Inc. But E-Trade and Charles Schwab pioneered the manager pay-to-play model in 2011 and 2013, respectively.
But in October 2017, TD Ameritrade realigned with State Street Global Advisors and its revamped lineup of portfolio building (and reduced price) SPDR ETFs, pushing aside several iShares and Vanguard products. And by August 2018, Vanguard dropped commissions on all ETFs except those focused on daily returns using leverage. (According to a Vanguard spokesman, despite the removal of trading commissions, "roughly half of our retail brokerage participants that hold ETFs didn't place a single trade in 2018.")
The politics of these programs has become increasingly competitive for both issuers and brokers. While institutional users of ETFs won't be directly affected, the additional incentive of free trades for retail investors and their intermediaries could help to attract assets and liquidity for some products.
For example, ETFs in Schwab's OneSource program ended 2018 with $115 billion in program assets and $22.8 billion in flows, according to a company spokesman.
"It's just another consideration in how you build your expense ratio," said Ed Rosenberg, Chicago-based senior vice president and head of exchange-traded funds at American Century Investments, which managed $163 billion, including $87 million in ETFs.