TD Ameritrade has decided to change out its entire commission free ETF lineup. They are dropping almost all the Vanguard and iShares ETFs. In return they are adding ETFs from QuantShares, First Trust iShares, J.P. Morgan Asset Management, PowerShares, ProShares, SPDR, and WisdomTree.

The list used to have 100 commission free ETFs and now it will have 296.

Customers under the existing commission free ETF program have until November 20th, 2017 to sell ETFs that have been dropped from the commission free list and switch to free alternatives. After November 20th, 2017, anything not on the list will incur standard trading fees.

Resources from TD Ameritrade:

• Old list of commission free ETFs
   
• New list of commission free ETFs
   
• TD Ameritrade’s commission free ETF explorer tool
  As of 10/17/17 this tool is pretty hard to use. It lists both the old and new ETFs. It also has some layout issues, lots of horizontal scrolling when certain filters are active.
   
• TD Ameritrade’s ETF comparison tool
  Can be useful to compare across the board between similar ETFs.

What’s new on the list?

The new choices are an impressive (and somewhat dizzying) array of specialized funds that allow placing very specific bets. For example, just about every sector, country, stock index, bond type bond duration, and investment strategy (leveraged, short, hedged, etc) made it on the list. This was obviously intentional by the team that crafted the new list. Precious metals are notably absent.

Here is a sample of some of the more exotic ETFs TD Ameritrade added to their commission free program:

• VIXM ProShares VIX Mid-Term Futures ETF (expense ratio 0.87%)
• CIBR First Trust Nasdaq Cybersecurity ETF (expense ratio 0.60%)
• FIW First Trust Water ETF (expense ratio 0.57%)
• FALN iShares Fallen Angels USD Bond ETF (expense ratio 0.25%)
• HDG ProShares Hedge Replication ETF (expense ratio 1.84%)
• MRGR ProShares Merger ETF (expense ratio 3.81%)
• BTAL QuantShares US Market Neutral Anti-Beta Fund (expense ratio 3.13%)
• PUTW WisdomTree CBOE S&P 500 PutWrite Strategy Fund (expense ratio 0.44%)
• XSOE WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (expense ratio 0.58%)
   

This change makes sense for TD Ameritrade, but does it make sense for a regular investor?

As I understood it, the spirit of the original commission free ETF program was to make it easy for the little guy to invest in ETFs every paycheck and rebalance when needed. The program still allows a three fund total market indexed portfolio, but now seems to encourage specialized bets (aka gambling).

Speaking of which, one thing to be aware of is you have to hold the shares of the ETF for at least 30 days to keep the trade free. Otherwise you get hit with a short term trading fee (which is being reduced to $13.90 as part of this roll out). TD Ameritrade is very up front about this, but it is easy to forget.

But buy and hold isn’t how TD Ameritrade makes money. So the fact they are encouraging trading with all these options makes sense from their business perspective.
 

Where to go from here?

Doing a wholesale swap out from the old ETFs to new equivalents may have tax consequences, especially if you have gains racked up (like I do).

Personally I won’t be rushing to swap anything out. Instead I’ll be researching the alternatives on my own and if/when I make new purchases I’ll opt for something on the free list if it fits.

As a result of this change TD Ameritrade is going to get away with dinging me for a few commission fees down the road. That really annoys me but I’m basically trapped. TD Ameritrade should give me 10 free trades, a gift card, or at least say ‘sorry we cut all your funds from the free program’.

With so many popular ETFs being dropped, it will take some research to find replacements. For example Vanguard Total Stock Market Index Fund ETF (VTI) is going off the list. A possible substitute is SPDR® Portfolio Total Stock Market ETF (SPTM) but comes with an expense ratio of 0.10% which is still low but annoyingly 2.5x higher than VTI’s (0.04%).

Allocation based ETFs on the commission free list:

For investors looking for worry free auto-balancing, the list includes four new asset allocation funds from PowerShares. They also kept the previous four from iShares.

• PSMG PowerShares Growth Multi-Asset Allocation Portfolio (expense ratio 0.39%)
  60%-80% in Equity ETFs and 20%-40% in Fixed Income ETFs

• PSMB PowerShares Balanced Multi-Asset Allocation Portfolio (expense ratio 0.39%)
  50%-70% in Equity ETFs and 30%-50% in Fixed Income ETFs
   
• PSMC PowerShares Conservative Multi-Asset Allocation Portfolio (expense ratio 0.37%)
  20%-50% in Equity ETFs and 50%-80% in Fixed Income ETFs
   
• PSMM PowerShares Moderately Conservative Multi-Asset Allocation Portfolio (expense ratio 0.38%)
  20%-50% in Equity ETFs and 50%-80% in Fixed Income ETFs

• AOA iShares Core Aggressive Allocation ETF (expense ratio 0.33%)
  80% stocks 20% bonds
   
• AOR iShares Core Growth Allocation ETF (expense ratio 0.34%)
  60% stocks 40% bonds
   
• AOM iShares Core Moderate Allocation ETF (expense ratio 0.34%)
  40% stocks 60% bonds
   
• AOK iShares Core Conservative Allocation ETF (expense ratio 0.35%)
  30% stocks 70% bonds

With the PowerShares group, that is a pretty wide allocation difference. That may indicate an ‘active’ management approach, which the prospectus would explain. Plus it isn’t really clear what the difference is between Conservative and Moderately Conservative?

Some details about the iShares Core Allocation funds.