Is Zero-Commission Trading Truly Free?

There has been much in the financial news recently about many brokerage houses moving towards zero commissions on stock trades. On the surface, zero commission trades seem like a good deal. However, firms that offer this option must get paid somehow, otherwise they would not do this.  There are a few other costs that investors should be aware of when trying to preserve a cost-effective investment portfolio.

Expense Ratios

While this is more straightforward than other costs (as it is openly disclosed), it is a cost nonetheless that an investor should be aware of. An ETF or Mutual Fund’s operating expenses such as distributions, management, marketing etc. are some of the costs of doing business. That said, this is something that an investor can minimize. Small differences in expense ratios can cost one a lot in the long run. Below is an illustration of how these small differences can add up:

Dimensional Fund Advisors, with whom clients are familiar with, recently announced they would be reducing their expense ratios for several funds, starting February 28, 2020. Below is a list of the funds: