Last Updated Feb 3, 2010 10:58 AM EST
ETFs are great for one-time big investments since their costs are generally lower than mutual funds, but they don't work so well for investors who build a position with smaller, regular installments. That's because, unlike mutual funds, ETFs trade on a stock exchange, and you pay a commission every time you invest. Fidelity has blazed new trails by eliminating commissions on ETFs.
This is a very good thing. That is not to say, however, that you should just jump in. Fidelity is eliminating commissions for at least three years, but that doesn't mean they are eliminating total costs. Keep the following in mind:
- Commissions are only part of trading costs. Bid-ask spreads must still be paid with every trade that you don't have with mutual funds.
- ETFs can typically only be bought in whole shares, where mutual funds can be bought in fractional shares. This makes regular purchases of ETFs more difficult.
- iShares ETFs have low costs though they are not always the lowest. It might still be better to pay the commissions to buy Vanguard ETFs, as lower expense ratios may ultimately be a lower-cost way of investing.
Lower costs are always a good thing. Hats off to Fidelity and iShares for the service they are providing to investors.