The race to zero commissions for online brokers is not without consequence for exchange-traded fund managers, which could see an uptick in inflows now that a barrier to entry for investors has been removed.
But the decision by several online brokers to drop trading commissions for stocks, ETFs and options, may also heighten investor scrutiny of ETF costs and drive money managers to take a hard look at their product lineups in an effort to stand out in a zero-commission environment, sources say.
Announcements in October that Charles Schwab Corp., Fidelity Investments, TD Ameritrade Holding Corp., and E-Trade Financial Corp. are going to zero commissions is a "net positive," for both investors, who will have a larger choice of ETF products, as well as smaller ETF issuers that no longer need to be concerned about being on a commission-free platform, said Matthew J. Bartolini, managing director, head of SPDR Americas research at State Street Global Advisors, Boston.
"Costs to own or to trade (ETFs) have now been lowered," Mr. Bartolini said. "So, I think it's going to be one of those factors that supports the tailwinds driving the usage of ETFs." State Street had $698 billion in ETF assets under management as of Sept. 30, according to its recent earnings report.
As result of the zero commissions announcements, however, money managers might also find retail and institutional investors putting other ETF costs under a microscope.
For example, investors may ask: "If everything's in a commission-free world, what is my execution cost?" Mr. Bartolini said.
"There will be a tighter, more focused scrutiny on trading costs, but also what execution analysis looks like. (For instance), did I get best execution for this, or has that commission somehow been passed along on a different variable?" he said.