Canadian Couch Potato broke the news last week that Scotia iTrade became the first discount broker in Canada to offer commission-free trading on some exchange-traded funds. Out of the 200 or so ETFs available on the TSX, Scotia iTrade will not charge commissions on forty-six ETFs: 31 from Claymore, 8 from iShares and 7 from Horizons. There is refreshingly little fine print on the deal: the trades must be placed online or via telephone and ETF must be held for a minimum of one business day.

The list of Claymore ETFs sans commissions is so extensive that an investor can assemble a portfolio composed of broadly-diversified asset classes from the ETFs in it. For example, one could assemble a portfolio similar to the Sleepy Portfolio out of the Claymore 1-5 Year Laddered Govt. Bond ETF (TSX: CLF), Horizons S&P/TSX 60 Index ETF (TSX: HXT), Claymore US Fundamental Index ETF (TSX: CLU.C), Claymore International Fundamental Index ETF (TSX: CIE), Claymore Broad Emerging Markets ETF (TSX: CWO) and perhaps a smidgen of Claymore Global Real Estate ETF(TSX: CGR).

Claymore and Scotia iTrade deserve a pat on the back for this innovation. However, investors should carefully calculate for themselves whether switching to iTrade (if necessary) and picking products from the commission-free ETF list will result in lower costs overall. Trading commissions, after all, are only one component of investing costs. Investors should also consider Mangement Expense Ratios, turnover, tracking errors, bid-ask spreads and the tax implications of switching investments in a taxable account.

For example, John, a passive investor with $10,000 in the iShares S&P TSX ETF (TSX: XIU) and making 6 transactions per year in a RRSP account can lower overall investment costs by switching to Claymore Canadian Fundamental Index ETF (TSX: CRQ) in a Scotia iTrade account (I admit that this example is a bit contrived because the investor will be better off investing in the TD Canadian Index e-Series instead). The investor was earlier paying $17 in XIU MER and $180 in trading commissions at $30 per trade for a total of $197. After switching to iTrade and CRQ, John will be paying almost $100 less in total costs. The commissions are free and CRQ’s charges 0.71% in MERs, so the total cost after switching to iTrade drops to $71.

The experience of Jane, another investor with $100,000 allocated to XIU and making the same six transactions per year is much different. Jane is paying $170 in XIU’s MER but just $60 in trading commissions for a total of $230. Moving accounts to Scotia iTrade and switching to CRQ is more expensive for Jane because she will now be paying $710 in CRQ fees.

Personally, I find one very interesting ETF in the list — the Horizons US Dollar Currency ETF (DLR). With trading commissions eliminated on this ETF, converting currency from CAD to USD or vice-versa should become even cheaper at Scotia iTrade. Eliminating commissions on a trade an investor is going to make anyway is obviously a good thing. For all other trades, the analysis gets a lot more complicated and the benefits a lot murkier.

This article has 7 comments

  1. Let us hope that the other brokerages follow suit. Momentum and calendar investors are rejoicing with this great news.

  2. Really? Trying to find a downside for “free trades” on ETFs? Way to rain on the parade. 🙂

    Putting aside the free trades, what this does for competition (some could argue BNS seeing Vanguard up ahead on the highway) is really the important factor. I think the next will be BMO:IL offering free trades on their BMO ETFs and perhaps others will follow.

    Claymore has even paid for a commercial to advertise this new offering, so hopefully individuals will start asking questions to their mutual fund salespersons.

  3. @Dale: Anytime investing costs go down is a good thing. And yes, I for one am hoping for commission-free ETFs at TD Waterhouse. I’m also hoping every ETF I hold is on that commission-free list 🙂

    @Jon D.: I feel commission-free ETFs will turn out to be very popular because the commissions are a known quantity but MERs and other costs are not broken out separately. So, it’s a good bet that BMO will follow suit and offer free trading on BMO ETFs at BMO IL.

    TD Bank must be kicking themselves that they got out of the ETF game.

  4. Great job CC.

    It will be interesting to see if BMO follows suit with commission-free ETFs.

    I was pleased to see some of the bond ETFs, like CLF make the list. Although I don’t have an iTrade account, I’m curious if ScotiaMcLeod Direct Investing clients (like myself) will be able to avail of the same benefits.

    The Sleepy Portfolio really brings to light how the investor can practically go all out with Claymore ETFs without having to incur any commission fees and have a portfolio in place. In my view, some great marketing minds went into making this happen.

    I think the investor should be prudent in taking the time to assess whether it’s worth switching over to take advantage of the commission-free benefits.

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