Vanguard commission-free ETF trading is here

I wrote last month about Vanguard’s announcement of commission-free ETF trading coming “in August.” Well, it’s August, and commission-free ETF trading is here!

Which ETF’s are commission-free to trade?

You can find the full list of commission-free ETF’s here, but as a rule of thumb, it is supposed to include essentially all non-inverse and non-leveraged ETF’s.

Potential uses of non-Vanguard ETF’s

Vanguard already offers a suite of low-cost ETF’s that are best-in-class for building blocks of a portfolio if you’re inclined to use ETF’s instead of mutual funds, for example in taxable brokerage accounts.

But there are lots of potential investment strategies Vanguard doesn’t have ETF’s (or mutual funds) corresponding to, and which are now available commission-free on their trading platform.

• Country-specific ETF’s. The iShares line of ETF’s offers exposure to the public companies in an incredible number of developed and emerging economies, from Poland to Belgium to Malaysia to Peru. Since ETF trading is commission-free, if you have the patience and interest to do so you could even recreate the exposure of a developed market or emerging market fund, but with enough increased granularity to also take advantage of opportunities to harvest capital gains and losses in a taxable account. Note that many of these countries have very few publicly traded companies, so these ETF’s are extremely concentrated bets on a small number of publicly listed companies — just 25 in the case of Peru.
• Currency-hedged ETF’s. Like iShares, WisdomTree offers a number of country-specific ETF’s, many of which are hedged back into US dollars. So if you think a particular country will perform well in its home currency and don’t want to take on additional currency risk, WisdomTree offers a number of options that incorporate country exposure while removing currency exposure.
• Bespoke strategies. Some ETF’s incorporate specific investment strategies. For example, I find Cambria’s “shareholder yield” ETF’s interesting, since they combine dividend yield and net share buybacks to get a more comprehensive picture of how much money is being paid out to shareholders. In other words a company that pays out a high dividend but is aggressively issuing shares (diluting current shareholders) might look worse from a shareholder yield perspective than a company that is paying a lower dividend but is aggressively buying back shares.

If you’re going to invest, seek low costs and diversification

I think Vanguard funds are fine for virtually all long-term investing purposes, but I also think it’s perfectly reasonable for a dividend investor to look at Vanguard’s high dividend or dividend growth ETF’s (VYM and VIG for US stocks) and decide they prefer Cambria’s shareholder yield model (SYLD for the US). But the two options give exposure to essentially the same asset class; they’re substitutes for each other, not complements, so if you own both you’re not “diversifying” your portfolio, you’re just adding a minuscule tilt towards share buybacks and away from dividends.

Likewise there’s no reason to own a low-cost Vanguard emerging markets mutual fund and a bunch of iShares country-specific emerging market ETF’s.

If you’re going to gamble, make bold moves with small amounts of money

On the other hand, setting aside 5% or 10% of your investable assets to make aggressive bets on particular funds seems perfectly reasonable to me, as long as you know what you’re buying, why you’re buying it, and what you’re paying for it.

I don’t think you’re very likely to outperform a market-cap-weighted low-cost portfolio over time, just like I don’t think you’re very likely to walk off a casino floor with more money than you walked on with, but unlike some scolds, I also know that gambling is fun. And, thanks to Vanguard, it’s cheaper than ever.

Conclusion

As I wrote in my original post, the best thing about Vanguard offering commission-free ETF’s is that Vanguard provides a full-service brokerage platform, allowing things like specific identification of shares that Robinhood currently does not. That means if you buy into a position over the course of months or years, you have more options for controlling your tax liability when you decide to exit it, either to realize taxable gains on shares during low-income years, taxable losses during high-income years, or weighting the two in order to reduce or eliminate any overall impact on your tax liability.