If you have an account with one of the major online brokerages, such as E-Trade, Fidelity, or Charles Schwab, then you’ve probably been reminded repeatedly about their commission-free exchange-traded funds. In general, those funds can be attractive for investors, especially those who dollar-cost average and would otherwise pay hundreds of dollars on dozens of commissions every year.

In many cases, a discount brokerage is the exclusive provider of a particular commission-free ETF. So if you’re partial to, say, the WisdomTree Japan SmallCap Dividend Fund, you will find it at E-Trade, commission-free. But if you buy it at Schwab or another discount brokerage firm, you may have to pay a commission (the cost is $8.95 at Schwab). Or if you want to buy the WisdomTree U.S. Dividend Growth Fund, you could buy that commission-free at Schwab, but you’d have to pay a commission elsewhere.

Shopping for ETFs? Read "Why Bigger ETFs Are Usually Better."

Though it’s tempting not to pay commissions, don’t let the offers sway you too much. There are other costs you need to keep in mind. For example, consider how well the commission-free version of an ETF tracks its index compared with other ETFs that charge a commission. You may find that the return of an ETF that better-tracks an index—and that charged you a commission—dwarfs the savings you get from not paying a commission.

Also take into account the bid-ask spread (the difference in price between the highest price a buyer is willing to pay for an asset and the lowest price at which an investor will sell). If the spread is wide for a commission-free ETF, it could end up costing you more than an ETF where you pay a commission but the spread is narrow. Let’s say the bid-ask spread of a commission-free ETF trading at $20 is 10 cents. Its spread would come to 0.50 percent. That means that if you buy the ETF and then sell it immediately, you would lose 0.50 percent of your investment. Compare that with paying a commission for an ETF with a narrower spread.

One way to find ETFs with narrower spreads is to invest in those with more than $10 billion in assets. As the assets get smaller, the spreads tend to increase.

Last, consider the expense ratio, which reduce your return. You could buy a commission-free ETF with an expense ratio of 0.40 percent, which will cost you $4 annually for every $1,000 you invest. Or you could pay a commission but get an ETF that carries an expense ratio of 0.07 percent. That latter would cost you just 70 cents annually.

—Chris Horymski

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