Cheapest online brokers to trade ETFs

So you believe in ETFs - low cost, passive investing. Have you thought about the cheapest brokers to trade ETFs?

We analysed the major online brokers in Australia, plus two newer players to the market:

  • CMC Markets;
  • nabtrade;
  • Westpac;
  • Bell Direct;
  • CommSec;
  • e*trade
  • HSBC
  • OpenMarkets
  • Interactive Brokers

 

It is hard to directly compare the cost of online brokerage. Each broker quote their prices slightly differently. They have different minimum price per trade, tier pricing structure, etc.

We'll take a look at brokerage costs on two levels. A) trading an individual ETF (one transaction). B) trading ETFs to build a portfolio over a year.

 

Trading individual ETFs

We looked at four scenarios based on a $1K trade, $2K trade, $5K trade and $10K trade. The slides below shows the $ cost and the % of traded value of each broker.

1% transactions costs is sometimes considered the maximum transactions costs you should incur. At $1K per trade, only Interactive Brokers achieves this goal. From $2K per trade onwards, all brokers offer transactions costs of <1% of traded value.

Across all scenarios, Interactive Brokers ranked number one, followed by CMC Markets and OpenMarkets.

You should note that Interactive Brokers has a minimum monthly fee. So the cost of a single trade might be misleading. More about that below.

 

Trading ETFs to build a portfolio

If you are investing for the long term, your ETF portfolio should be diversified with multiple ETFs. You might add to your portfolio every few months to keep it growing. So what are the transactions costs of trading ETFs in this context?

We ran the numbers on 4 scenarios again. Each scenario assumes that you'd top up your portfolio 4 times per year. The portfolio has 4 ETFs in it. Each ETF trade is worth $1K, $2K, $5K or $10K per trade.

For the $2K per trade scenario, you would made four $2K ETF trades (totalling $8K), four times a year. This is a total top up of $32K added to your ETF portfolio over the year.

The slides below shows the total cost of trading ETFs over the year. This includes any monthly costs charged by the broker.

At the portfolio level, transactions costs is more than 1% of traded value for all brokers when $ per trade is only $1K. Again, from $2K per trade onwards, you can achieve transactions costs of <1% for all brokers.

Across all scenarios, CMC Markets ranked number one and OpenMarkets ranked number two. The number three spot changes between nabtrade and Bell Direct.

Interactive Brokers falls outside the top three because of their minimum monthly brokerage fee. They are the only broker with a minimum monthly fee. You have to pay a minimum of US$10 in brokerage per month, even if you don't make any trades. At 70c AUD/USD conversion that is A$171 minimum brokerage costs per year.

Overall, CMC Markets and OpenMarkets seem to be really cost effective options to trade ETFs and build an ETF portfolio.

 

Trading ETFs listed in the US

One strategy that is not as popular is to use a broker to trade ETFs listed in the US. The depth of the US ETF market is 10 times that of Australia. There are roughly 1,400 ETFs listed in the US. You can find weird and (potentially) wonderful ETFs that you'd never find in Australia. For example, the Exponential Technologies ETF, Leveraged Biotechnology ETF, and Inverse China ETF.

You can also find the US version of ETFs listed in Australia at a much lower management fee. For example, the Vanguard FTSE Emerging Market Fund trades in Australia under VGE, with a management fee (MER) of 0.48%. It's US equivalent, trading as VWO, has management fee of 0.15%.

Interactive Brokers, CommSec, nabtrade and e*trade all offer trading of US listed ETFs. The chart below shows the cost of a A$5K trade through each broker, assuming you buy the Vanguard S&P 500 ETF.

Interactive Brokers is by far the cheapest option on a single trade basis - coming in at A$0.13. Again, consider the minimum monthly fee with them.

Another important cost consideration is the foreign exchange rate (FX). When you buy US listed ETFs,  your broker will require you to convert your AUD into USD first. Banks being banks will charge you a fee for that privilege, adding to your costs. FX spreads charged by these four brokers (ranked) are:

  1. Interactive Brokers: 0.2%
  2. nabtrade: 0.5% - 0.8%
  3. e*trade: 0.6%
  4. CommSec: approx 0.9%

 

You should increase your transactions costs of US ETFs by this FX spread. Something to be aware of.

Also, be aware that you will need to fill in a W8-BEN form for all your investments in US listed ETFs. The same applies for ASX listed ETFs that are cross-listed, like VTS, VEU.

 

Special note on Interactive Brokers

It's great for consumers to see more competition in online broking in Australia. Interactive Brokers is a large player listed in the US with market cap of US$16 billion.

They are leading the way in using technology to drive down brokerage costs. Their solution is focused on active traders.

As Aussie investors, you should be aware of their segregated account structure. Your shares or ETFs traded through them are not held through a HIN. They are held in Interactive Broker's name, but beneficially owned by you. Inside their systems, your shares are "segregated" from shares own by other people, AND Interactive Broker's proprietary stocks. Your shares cannot be used for any purposes other than for your own trading.

They were really responsive when we contacted them for clarification. To manage counter-party risks, their clients are covered up to $500,000 by the Securities Investor Protection Corporation. The company also has extra insurance up to $150 million and $5 billion of equity on their balance sheet. Consider this point if you are interested in using them.

 

Drop me a line if you have any feedback or questions.

About the Author

jeremykl

Cofounder & CEO of BetterWealth (@jeremykwonglaw). Former investment banker turned technology entrepreneur. muru-D alumni (Telstra startup accelerator). Passionated about leveraging technology to provide better financial products & services to consumers. Coffee snob, business book reader, and fitness fan.

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