Additional Online Brokerage Services — Mutual Funds and ETFs

‘A random walk down Wall Street’ by Sage Ross (Complete photo credits are located at the end of this article.)

Hello again!

Welcome to the third installment of Earl’s step-by-step guide to selecting an online brokerage firm.  So far in this series, we’ve discussed the importance of identifying the target demographics of online discount brokers, made some top online brokerage fee comparisons, and I even dished out some healthy advice to personal investors who are unsure where their relationships — with their stockbrokers — are headed. (Eat your heart out, Dear Abby!)

If you have not yet read one or both of those articles, and would like to, simply make use of the hyperlinks provided below:

In this segment, I’ll be discussing how brokerage firms vary regarding mutual fund and exchange-traded fund (or ETF) services.  For instance, did you know that purchasing shares for particular mutual funds and ETFs comes attached with an additional transaction fee through some online discount brokers, and no additional transaction fee through other brokers?  As such, it is prudent to assess the specifics of individual brokerage mutual fund and ETF policies before opening an account with a firm, in order to ascertain whether or not you will be slapped with additional transaction fees while purchasing shares of your favorite no-load mutual funds and/or ETFs!

We’ll cover such considerations and more in the following paragraphs, so put on some workout music and get ready to exercise your noggin!

Additional Online Brokerage Services — Mutual Funds and ETFs

For conservative investors, the quality of no transaction fee (or NTF) no-load mutual funds and exchange-traded funds offered by an online brokerage is of the utmost importance.  Aggressive traders may also balk at a firm with a paltry selection of NTF no-load funds and ETFs, as even the most adventurous speculator of futures may wish to place a portion of his or her portfolio in securities that (essentially) run on autopilot.  When evaluating online brokerage firm services regarding NTF no-load mutual funds and ETFs, there are three factors to take into consideration:

  • Whether or not the firm actually offers no-load mutual funds and ETFs; or, for that matter, mutual fund and ETF trading at all!
  • If no-load mutual funds and ETFs are included in the online brokerage services provided by the firm, are the specific securities that you wish to purchase available (through the firm) for NTF trading?
  • If your preferred no-load mutual funds and/or ETFs are not available through the online brokerage firm’s NTF trading services, are comparable NTF securities available to purchase as an alternative?  Or, if no acceptable alternatives are offered, what are the transaction fees associated with purchasing your preferred securities through the firm (and would you be willing to pay them)?

Earl’s Insights: What Are Exchange-Traded Funds (ETFs)?

Certain index mutual funds are traded on a stock exchange.  Therefore, they are known as exchange-traded securities, and more specifically Exchange-Traded Funds — or ETFs.  There also exists other less common varieties, including inverse and leveraged exchange-traded funds (IETFs and LETFs, respectively), that are not recommended for inexperienced investors.

Do the Brokerage Firm’s Online Trading Services Include NTF No-Load Mutual Funds and ETFs?

Not all brokerages have jumped on the mutual fund and ETF bandwagon.  For example, firms that specialize in serving complex options and other derivatives traders may decide that too few of their clients are interested in such securities.  Subsequently, such brokers can hardly be expected to bother with making these securities an attractive part of their platform.  Moreover, even if a brokerage does offer robust mutual fund and ETF analysis and trading tools, you will want to narrow your search of the catalogue to identify only funds that do not come attached with additional sales loads (i.e., “no-load funds”, or “NL funds”).

Sales loads are the fees that brokerages impose upon unwary investors (who don’t know any better), for purchasing shares of certain mutual funds.  They are essentially a mandatory “tipping” system put in place to encourage brokers to sell various funds.  Not only are these charges easily avoided by selecting among the many quality no-load funds available, but they are — quite frankly — insulting.  There is simply no excuse for discount online brokers to peddle mutual funds with sales-loads, when the majority of mutual fund share trades made by the firm’s clientele have been executed without ever consulting an on-staff broker!

Discount broker offering mutual funds with sales loads: “You’ll find everything you need over there, somewhere — I guess. Just wake me up when you’re ready to pay.”

To draw a comparison:

Imagine yourself in the process of purchasing a new car.  Upon arriving at the dealership, the salesman excuses himself in order to go and take a nap, leaving you to search for a vehicle that suits your needs on your own.  Once you have found the perfect car, you must then print out the necessary paperwork, set up a loan with the bank, and finalize the transaction — all without any help from the dealership staff.  Then, just as you are ready to drive off the lot with your shiny new purchase, the salesman wakes up and demands that you pay him a commission for services rendered!

This is essentially what you are being asked to do when you buy a mutual fund with sales-loads from a discount online brokerage.  There are other reasons to avoid funds such as these, as well, regardless of the kind of broker you trade through.  For example, loaded mutual funds typically incur higher expense ratios, which hurt long-term returns.  Also, mutual funds with sales-loads haven’t been proven to perform any better than no-load funds.  Statistically speaking, such funds often perform worse!

Earl’s Insights: How Do Mutual Funds Work?

Feeling lost?  If you are unfamiliar with the differences between sales load and no-load funds, as well as other mutual fund terminology used in this section, then I encourage you to take a look at my introductory guide to these securities: Mutual Fund Investing for Beginners. (An additional link to the tutorial is located at the end of this article, under the ‘Other Personal Finance Tutorials’ section.)

If So, Are the Right NTF, No-Load Funds and ETFs Available for Online trading?

Once you have pulled up a list of no-load funds offered by a firm, it will be time to look and see which of these are “sponsored” — i.e., which are available through the broker without additional transaction fees (“no transaction fees” or “NTF” funds).  More specifically, you must determine whether or not the no-load fund(s) or ETF(s) that you wish to purchase are available through the firm for NTF trading!  As I touched on earlier, transaction fees are levied by brokers when clients purchase from a pool of “unsponsored” mutual funds and/or ETFs (not to be confused with trading commissions, which are separate class of fees).

Brokerages like to complicate matters, and some firms charge additional transaction fees for certain mutual funds and ETFs, and no additional transaction fees for others.  Each broker has a different policy regarding these (arguably absurd) transaction fees, with some brokerages charging as much as $50 per order regardless of the fund selected, and still others choosing to waive the fee entirely for mutual funds and ETFs from sponsored  families.  Naturally, finding a brokerage that is suitable to your personal investment strategy, that also offers the NTF no-load mutual fund(s) and ETF(s) that you wish to purchase, would be the ideal outcome.  However, securities are included (or not) in NTF trading lists arbitrarily by brokerages, depending on internal marketing decisions and partnerships between financial service providers and mutual fund companies. (Everyone on Wall Street is playing some sort of angle!)

For instance, Vanguard clients are able to purchase The Vanguard Group funds and ETFs without additional transaction fees.  If an investor should instead wish to purchase mutual funds from TIAA-CREF or ETFs from Fidelity, then he or she will incur a charge of as much as $35 per order for buying outside the Vanguard family of securities.  Contrarily, Scottrade clients may purchase from a wide variety of mutual funds and ETFs without worrying about being slapped with additional transaction fees, but should an investor wish to purchase Vanguard funds or ETFs through Scottrade, he or she will be charged to the tune of $17 per order for that privilege!

Earl’s Insights: Quality Over Quantity

You remember the age-old axiom “quality over quantity”, right?  Likewise, don’t be impressed with the sheer number of NTF, no-load mutual funds and ETFs that may or may not be offered by a brokerage firm.  Whether an investment security is available for purchase without transaction fees has nothing to do with the actual merits of the security.  In the long run, purchasing a terrible mutual fund or ETF with transaction fees is no different than purchasing a terrible NTF mutual fund or ETF.

Are Comparable NTF No-Load Funds and ETFs Offered for Online Trading?

Finding out that your favorite no-load mutual funds and/or ETFs are not available for NTF trading through a broker is a lot like walking into a restaurant and asking for Coke, only to learn that the establishment is a Pepsi sponsor — i.e., If you enjoy the food at the restaurant (and can settle for Pepsi), then by all means, sit down to your meal without giving the matter another thought.  But if you’ve just got to have Coke, then you would probably be better served by taking your business to another restaurant that offers comparable food and your favorite beverage!

“I’d like a glass of Coke, please … WAIT! Whaddaya MEAN you’ve only got Pepsi?!”

Similarly, if the investment securities that you wish to purchase are not available for NTF trading from a brokerage with which you are considering opening an account, take a look at the NTF no-load funds and ETFs that the firm does offer.  You may find comparable securities to those you previously had your heart set on.  However, if you cannot find a suitable alternative — or if you simply must have specific securities — then you must decide whether to suck it up and fork over the transaction fees the firm charges every time you want to buy shares for the funds/ETFs, or simply choose to open an account with a brokerage that offers comparable services and NTF trading for the no-load mutual funds and/or ETFs that you desire.

Summing it Up:

How important is NTF no load fund and/or ETF (online) trading to your investment strategy?

Once you have familiarized yourself with brokerage firms’ no-load mutual fund and ETF offerings, as well as the additional costs associated with purchasing these securities through the firm, you will be better equipped to assess the relative advantages to you of opening an account with one firm versus another.  Don’t be impressed with the sheer quantity of NTF no-load mutual funds and ETFs that may (or may not) be offered by an online discount brokerage — assessing the quality of the securities that a firm offers without transaction fees is more important.  Check out Table 3 below for a comparison of the various transaction frees for (non-sponsored) mutual funds and ETFs charged by some popular brokerages.

Table 3. Transaction Fee Comparisons (for Unsponsored Funds & ETFs) for Some Popular Brokerages:

Transaction Fees   
Interactive Brokers
Merrill Edge
TD Ameritrade
Wells Fargo Advisors

Note: While your author has striven to construct this data with reliable data at the time of writing, remember that fees can and will change over time.  Verify costs with brokerage firms before opening an account.

<–[Previous] The 2nd installment of Earl’s step-by-step tutorial for selecting an online brokerage firm, which includes: ‘Section II. Online Brokerage Fee Schedule Analysis — Made Easy!’

[Next]–> (Check back soon for the 4th and 5th installments of this series!)

Other Personal Finance Tutorials

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Photo Credits

  1. ‘Wall Street on a rainy night’ (A random walk down Wall Street). Source: Sage RossCC-BY-SA-2.0, via Flickr. 2008 Dec 11 [cited 2013 Oct 17]. Available from:
  2. ‘People sleeping outdoors during a heat wave, St. Paul, 1936’ Source:Minnesota Historical Society, CC-BY-SA-2.0 (see link at No. 1), via Flickr. Circa 1936 [cited 2013 Oct 17]. Available from:
  3. Glass of Coca-Cola’ Source:Simon CocksCC-BY-2.0, via Flickr. 2010 Aug 21 [cited 2013 Oct 17]. Available from:

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