TD Ameritrade is staking a bold claim in the low-cost ETF space, announcing it will dramatically expand its menu of commission-free funds from leading asset managers.

The custodian plans to offer advisors and retail investors access to 296 commission-free ETFs, nearly tripling its current roster of 100 funds and sending a shot across the bow of rivals Schwab and Fidelity.

TD boasts of its long roots in the ETF space, but amid explosive growth in that sector, the firm's lineup had gotten "fairly stale," according to Kostya Etus, a portfolio manager with CLS Investments, an ETF strategist based in Omaha, Nebraska.

(Bloomberg News)
TD’s lineup will include offerings from AGFiQ, First Trust, BlackRock, JPMorgan, Invesco and WisdomTree.

He expects the new fund lineup to have a ripple effect throughout the industry.

"I think it's going to be a huge realization … that this is something that everybody needs to be doing. These lineups need to be revamped," Etus says. "Now that they've done it, I think they've really raised the bar for everyone else."

TD's move comes as the latest salvo in the ongoing fee wars in the ETF space, the "race to zero," as asset managers and custodians look to undercut each other by slashing commissions.

TD's lineup will feature a new suite of 15 ultra-low-cost ETFs from State Street Global Advisors. State Street's SPDR Portfolio ETFs, also announced on Monday, will carry expense ratios of between 0.03% and 0.11%, a move Etus expects will send Schwab scrambling to respond.

Jim Dario, managing director of product management for TD Ameritrade Institutional.
“Clients asked us for greater choice and a wider variety of high-quality, commission-free ETFs,” said TD's Jim Dario.

"The most likely scenario going forward is that Schwab is going to have to reduce their fees to be lower than State Street," Etus says. "All of this has really created … this huge push to lower costs and [offer] better options for all investors."

The news follows closely on the heels of Charles Schwab's announcement earlier this month that it is rolling out the Schwab 1000 Index ETF, offering exposure to the nation's largest firms at a cost of five basis points and undercutting the fees of comparable funds offered by other firms, at least until Monday's announcement from State Street.

Schwab spokeswoman Kaitlyn Downing declined to comment on the impact. "We won’t speak to competitor programs," Downing writes in an email, "but we will say that investors continue to embrace Schwab ETF OneSource and we’re immensely proud of the success that the program has achieved in just four years."

Asked about State Street's ultra-low-fee ETFs, Downing says: "The fact that prices are coming down on index products across the industry is great news for investors. For our part, Schwab has been an important catalyst in bringing those costs down."

CALLS FOR GREATER CHOICE
TD Ameritrade bills its new lineup as the industry leader in non-proprietary, no-commission ETFs, explaining that the expansion came in response to calls from its advisors and retail investors.

"Clients asked us for greater choice and a wider variety of high-quality, commission-free ETFs," Jim Dario, managing director of product management for TD Ameritrade Institutional, said in a statement.

Slideshow
Does aggressive turnover hurt fund returns?
Frequent buying and selling increases expenses and taxes — are these solid three-year returns worth it?

The U.S. ETF sector topped $2.5 trillion with more than 1,700 individual funds last year, up from $608 billion invested in 620 funds in 2007, according to data from Investment Company Institute.

In addition to the State Street funds, TD's new ETF lineup will include commission-free offerings from AGFiQ Asset Management's QuantShares, First Trust Portfolios, BlackRock's iShares, JPMorgan Asset Management, Invesco's PowerShares, ProShares and WisdomTree.

"As more regulation comes out, I think there's going to be more and more of a push to start using ETFs for client portfolios. Anyone investing in mutual funds that are particularly higher-expense-ratio funds is really going to feel the pain here," said Kostya Etus, a portfolio manager at CLS Investments.
"Anyone investing in mutual funds that are particularly higher-expense-ratio funds is really going to feel the pain here," said Kostya Etus, a portfolio manager at CLS Investments.

Schwab's Downing says her firm offers 244 commission-free ETFs through its OneSource program; Fidelity reports it offers 91. So by expanding its menu to nearly 300 funds, TD Ameritrade could become a more appealing custodian for advisors.

"For RIAs this is, once again, a huge benefit. You've got a much wider opportunity set to create investment opportunities for your clients," Etus says. "It's definitely a selling point. They've definitely lined themselves up with the growing ETF market."

PUSH FOR ETFs IN CLIENT PORTFOLIOS
He also argues that retail investors stand to gain from any industry shift that brings fees down, and calls TD's move a "homerun" in the face of the looming Department of Labor rule governing commissions and other compensation arrangements for retirement investments.

While the fate of that regulation remains uncertain amid a review of its potential impact, the specter of more government oversight and the competitive pressure of cheap ETFs are likely to further squeeze higher-cost mutual funds.

"As more regulation comes out, I think there's going to be more and more of a push to start using ETFs for client portfolios," Etus says. "Anyone investing in mutual funds that are particularly higher-expense-ratio funds is really going to feel the pain here…maybe that race to zero took the summer off [but] it's starting to ramp up into the holiday season."

Kenneth Corbin

Kenneth Corbin is a Financial Planning contributing writer in Boston and Washington.