Tips on ETF commissions

Commissions can be a significant component of the total cost of trading an exchange-traded fund.

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Exchange-traded funds (ETFs) are baskets of securities that can help you achieve your investing objectives by getting you exposure to different asset classes and mixtures of investments. Plus, they can be cost effective; many index ETFs are relatively cheap, based on their expense ratios, compared with actively managed mutual funds that focus on similar areas of the market.

However, the total cost of ownership of an ETF goes beyond its expense ratio. It includes other factors such as the bid/ask spread, tracking difference (how closely it tracks its benchmark index), and, of course, commissions. Factoring in the impact of commissions can be particularly relevant for active investors who trade somewhat frequently—especially if you are making relatively smaller trade sizes—as well as long-term investors executing a dollar cost averaging strategy.

Trade size matters

When it comes to the impact of commission costs, trade size matters. To understand why, assume that it costs $7.95 to buy or sell an ETF. If you had $1,000 in funds to buy and sell an ETF, that equates to paying $15.90, which is roughly 1.6% of the investment toward commissions. By comparison, if you were to buy or sell an ETF using $30,000 in funds, the same $15.90 commission would account for just 0.05% of your funds.

As the chart above shows, commissions also comprise an increasingly larger percentage of the total cost of ETF ownership at lower trade size levels. Of course, these relationships are true not only for ETFs but also for other investments—such as stocks. What is unique about the potential to manage ETF trading costs is that many brokerage firms—including Fidelity—offer commission-free ETFs available for purchase.

Suppose you are deciding between two ETFs—ETF A and ETF B—that offer similar exposure to a part of the market, have the same expense ratio (e.g., 0.02%), trade at roughly the same spread (e.g., 0.01%), and have the same tracking difference (e.g., 0.01%). ETF A is offered commission free, while ETF B incurs a $7.95 commission per trade.

In this example, a $1,000 trade size would translate to commissions of $15.90, representing roughly 88% of the total cost of buying and selling an ETF (see the table below). This is calculated as $15.90 ($7.95 x 2, which is the commission for both the purchase and sale of the ETF) divided by $18.10 (the total cost of ownership).1

As the table illustrates, the commission’s proportional contribution to total cost decreases with trade size. While commission costs account for 88% of the total cost for a $1,000 trade size, they are just 7% of total cost ($15.90/$235.90) for a trade size of $100,000.

If you are an investor making relatively small trades, or an active investor who is frequently buying and selling ETFs, these savings can really add up. Of course, costs are just one aspect of the investing decision; investors should consider their individual objectives and risk constraints when deciding which investment to make.

Commission impact on dollar cost averaging and rebalancing

Some investors use a dollar cost averaging strategy, which involves investing a fixed dollar amount on a regular basis—regardless of current market trends. Effectively, this can result in an overall average cost per share that is lower than it would be if a constant number of shares were bought at set intervals.2

Commission-free ETFs allow investors, particularly investors making relatively small trades in terms of investable funds, to use dollar cost averaging to more effectively manage the total cost of ownership.

Commissions also play a role when it comes to ETF portfolio rebalancing. Based on the frequency of a rebalancing strategy, and the number of positions being rebalanced, commissions can add up quickly (see the table).

Commission-free ETFs allow investors with a more active strategy the opportunity to manage the costs of rebalancing or rotating into and out of different ETFs.

Investing implications

There are some costs that investors have less control over—like the amount a fund charges and the size of the bid-ask spread. In addition, some funds track their index more closely than others. In some cases, the difference between the fund’s return and that of its underlying index—the tracking difference—can be greater than the net expense ratio. In other cases, the tracking difference can actually be less than the net expense ratio. This is a component of the cost equation that investors do not have control over, but it can be important nonetheless.

On the other hand, considering a commission-free ETF over a commissionable ETF offering similar or equivalent exposure—and a similar or equivalent expense ratio and tracking difference —is one way investors can decrease the total cost of ownership, particularly at lower dollar trade sizes. While the impact of commissions is just one of many factors that should be considered, commission-free ETFs may help you achieve your objectives.

Learn more

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Free commission offer applies to online purchases of Fidelity ETFs and select iShares ETFs in a Fidelity brokerage account. Fidelity accounts may require minimum balances. The sale of ETFs is subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal). iShares ETFs and Fidelity ETFs are subject to a short-term trading fee by Fidelity if held less than 30 days.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain Fidelity Brokerage Services LLC (FBS) platforms and investment programs. Additional information about the sources, amounts, and terms of compensation is described in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered service marks of BlackRock, Inc., and its affiliates.
Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility, as well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV), or indicative value in the case of exchange-traded notes. Each ETP has a unique risk profile that is detailed in its prospectus, offering circular, or similar material, and which should be considered carefully when making investment decisions.
As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing any investment by making it available to its customers.
1. For simplicity purposes, this example does not consider the impact of taxes, which can be significant.
2. Dollar cost averaging does not assure a profit or protect against a loss in a declining market. You must continue to purchase shares both in market ups and downs. The goal of dollar cost averaging is to attain a lower average cost per share.
Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus, an offering circular, or, if available, a summary prospectus containing this information. Read it carefully.
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Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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