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Vanguard Drops Trading Commissions; Kitces Explains ‘Amazing’ Race to Zero

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Vanguard has fully embraced the “race to zero,” allowing its brokerage clients to trade all stocks and options with no commissions. The news comes three months after rival Charles Schwab made such a move, which caused a series of larger changes in the competitive landscape, leading up to the announcement that Schwab planned to purchase TD Ameritrade for $26 billion.

Vanguard launched its first commission-free platform — including all of its mutual funds — in 1977. That was expanded to encompass Vanguard’s ETFs in 2010 and many other ETFs in 2018. 

Reflecting on the lead-up to Thursday’s development, popular blogger and financial planner Michael Kitces tweeted (in a thread): “As Zero-Com trend continues, Vanguard’s today announcing their no-transaction-fee ETF platform becomes a no-transaction-fee for stocks, options, AND ETFs platform. (And better-yielding cash.) Amazing outcome to war Vanguard fought for 2 years…”

Kitces reminded financial advisors and others in the industry about the origins of the no-transaction-fee battles and related platform issues: “Have to view this in the broader context, though. Was fall 2017 that TDA changed its NTF ETF platform, removing virtually all Vanguard funds & inserting State Street ETFs b/c Vanguard wouldn’t pay to play. [Vanguard] Wasn’t in Schwab’s NTF platform for same reason.”

On Oct. 16, 2017, TD Ameritrade eliminated about 84% of exchange-traded funds in its Market Center lineup, much to the chagrin of many advisors and their next-gen clients, Kitces commented at the time. 

“In the summer of 2018, Vanguard fired back at TDA (& Schwab) by launching a no-pay-to-play zero-commission ETF platform. As we wrote at the time, this destabilized pay-to-play NTF platforms, & would lead to ZeroCom ETFs,” Kitces said in another Tweet on Thursday.

“The rest,” as they say, “is [recent] history.”

“Sure enough, a year later Schwab announced ZeroCom on all ETFs (and stocks & options) to match (and one-up on stocks & options) what Vanguard had done,” Kitces continued.

“Now Vanguard is matching Schwab’s ZeroCom with no-commission stocks & options. But that’s not really why people go to Vanguard in the first place. It’s a ‘check-the-box’ adjustment for good competitive optics with Schwab, TDA, etc.,” the blogger explained in a tweet. 

The TD Twist

Kitces continued:, “The real significance and ‘coup’ here is that in the span of barely two years from when TDA unceremoniously booted Vanguard from their NTF ETF platform, Vanguard destabilized & largely obliterated the whole pay-to-play NTF ETF platform model.

“Which in part is why ETF distribution is now shifting to model marketplaces. Asset managers won’t pay for shelf space that Vanguar[d] killed, but asset managers do have ‘budget’ for distribution. So now they’re paying incentives to distribute models (w/ their ETFs) instead,” he tweeted.

Looking back over the past few years, what does the latest development ultimately mean for Vanguard, TD Ameritrade and others in the competitive space?

“Still, amazing show of Vanguard power. As it was TDA booting Vanguard from their NTF ETF platform that led Vanguard to launch ZeroCom ETFs, which led Schwab to match, which crushed TDA & forced a sale. So basically, TDA actually suicided in picking a fight w/ Vanguard!?! /end”

Vanguard’s View 

 “Lowering the cost of investing is business as usual ….,” said Karin Risi, head of Vanguard’s Retail Investor Group. “For 45 years, we’ve been dedicated to lowering the cost of index and active funds, ETFs, advice, and brokerage services to help investors achieve better outcomes.”

Clients should benefit from the zero commissions via lower costs for stock buying overall and when rebalancing, dollar-cost averaging and tax-loss harvesting, the privately owned firm said, adding that it manages some $6 trillion in assets. 

(Vanguard Brokerage Services will continue to follow a fee schedule that includes $1 per $1,000 face amount on bond trades and $1 per options contract.)

The firm also states that investors have realized some $750 million in estimated cumulative savings over the past four years thanks to expense ratio reductions on funds and ETFs. (Vanguard’s asset-weighted average expense ratio is 0.11% for mutual funds and 0.07% for ETFs, as of Dec. 31, 2018.) 

For fiscal 2019, Vanguard reported about $69 million in client savings tied to expense ratio reductions. It also plans a new trade path, as well as updates to its “online experience” and a redesigned mobile app.

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