For years, investors have reveled in a landscape where trading Exchange Traded Funds (ETFs) often came with a sweet $0 price tag. A decade-long trend saw major brokers aggressively slash commissions on ETFs, a move that significantly lowered the barrier to entry for individual investors. However, this era of seemingly free ETF trading may be drawing to a close, as financial institutions begin to explore new revenue streams, potentially shifting the cost burden back to the investor.
Recent developments reveal a strategic pivot by some of the largest brokerage firms. Instead of solely relying on investor-driven commissions, these firms are increasingly engaging with ETF issuers, seeking to establish "back-end" fees. When issuers decline to pay these fees, the consequences are beginning to trickle down to retail investors in the form of new transaction or service charges. This evolving business model signals a potential reversal of the low-fee trend that has defined ETF investing for much of the past decade, raising questions about the future cost of accessing the ETF market.
Fidelity: Pioneering the New Fee Structure
Fidelity has emerged as an early adopter of this new fee paradigm. The brokerage giant has begun implementing a "service fee" on purchases of certain ETFs. This fee is not levied on all ETFs, but rather targets a specific, albeit growing, list of funds issued by providers who have not entered into an agreement with Fidelity to pay a direct, asset-based fee.
The rationale, as outlined by Fidelity, is to offset the costs associated with supporting these ETFs on their platform. This includes expenses related to shareholder support services, the provision of sophisticated calculation and analytical tools, and the development of general investment research and educational materials pertaining to ETFs. In essence, if an ETF issuer does not contribute financially to Fidelity’s platform, the brokerage firm passes the cost of supporting that issuer’s products directly onto the investor at the point of purchase.
Currently, the service fee at Fidelity stands at 5% of the purchase amount, with a cap of $100. The list of affected ETFs is not extensive and tends to feature niche, thematic ETFs from smaller, less prominent issuers such as Roundhill and LifeX. Notably, this fee structure does not currently encompass the vast majority of popular, broad-market index funds from giants like Vanguard, State Street, or BlackRock (the issuer of the iShares series of ETFs). A comprehensive PDF list of these affected ETFs is available on Fidelity’s website, providing transparency to investors about which funds may incur this additional charge.
A Fidelity spokesperson, in a statement to NerdWallet, characterized these actions as part of "constructive dialogue" with issuers, aiming to "reach outcomes that reflect a more consistent approach across mutual funds and ETFs." This suggests that the current list of ETFs subject to the service fee is not immutable. Issuers who agree to a back-end fee structure with Fidelity may see their ETFs removed from this service fee list, effectively alleviating the transaction cost for their investors.
Charles Schwab: Laying the Groundwork for Issuer Fees
Charles Schwab, another prominent player in the brokerage industry, appears to be following a similar trajectory, albeit with a slightly different timeline and potential execution. Reports from last year indicated that Schwab was exploring a model where investors could face a fee of approximately $100 when purchasing ETFs from issuers who did not agree to pay Schwab a substantial portion, reportedly 15%, of their fee revenues.
While the exact investor-facing fee amount remains unconfirmed, Schwab’s CEO, Richard Wurster, alluded to plans to collect fees from ETF issuers during a recent earnings call. Furthermore, a Schwab spokesperson confirmed to NerdWallet that the brokerage firm is actively engaged in discussions with ETF issuers regarding platform fees.
"As our ETF platform grows in scale and sophistication, we have begun thoughtful, often bespoke, conversations with asset managers regarding platform fees," the spokesperson stated. "These discussions are expected to take place throughout this year, with implementation taking effect no later than Q1 2027."
This timeline suggests that Schwab is preparing to implement a system where ETF issuers will be incentivized, or in some cases compelled, to pay for prominent placement and support on Schwab’s platform. The ultimate impact on retail investors is still unfolding. While the spokesperson declined to confirm or deny whether Schwab would directly charge investors transaction fees on ETFs from non-paying issuers, the parallel with Fidelity’s strategy suggests this is a distinct possibility. The implementation could mirror Fidelity’s approach, where investors bear the cost if the issuer opts out of the back-end fee arrangement.
E*TRADE and J.P. Morgan: A Focus on Issuers, Potential Platform Exclusions
Morgan Stanley, the parent company of E*TRADE, has already established a system of charging ETF issuers a "data licensing fee." This fee is reported to be $10,000 per fund annually, with a minimum annual charge of $150,000. This fee structure is publicly available on Morgan Stanley’s website.
Crucially, Morgan Stanley’s policy includes provisions that grant them discretion to "not offer new ETFs launched by ETF sponsors that have not agreed to pay the Fee, or not to approve a new ETF sponsor for sales of its ETFs on our platform." This indicates a more stringent approach, where non-paying ETF issuers could face outright exclusion from ETRADE’s investment platform. While this policy is in place, NerdWallet has not yet found evidence of ETRADE actively excluding ETFs based on this criterion.
Despite the potential for platform exclusion, a source familiar with ETRADE’s plans indicated that the brokerage firm does not intend to introduce investor-facing service charges for ETFs from non-paying issuers. This suggests that, at least for ETRADE, the primary leverage is applied at the issuer level, with the threat of platform delisting serving as the main deterrent.
Similarly, J.P. Morgan’s self-directed investing platform has a "revenue share" program with ETF issuers. A source familiar with the platform confirmed that J.P. Morgan does not charge investors transaction fees for ETFs that do not participate in this program. However, the source declined to comment on whether J.P. Morgan might exclude non-paying ETFs from its investment platforms. This leaves open the possibility that certain ETFs could become unavailable to J.P. Morgan Self-Directed Investing customers, though no such exclusions have been publicly documented.
The Underlying Economics: Reclaiming Lost Revenue
The shift towards these issuer-focused fees is not arbitrary; it’s a strategic response to fundamental changes in the brokerage industry’s revenue landscape. For over a decade, the dominant trend has been the elimination of commissions on stock and ETF trades. This move, driven by competition and a desire to attract retail investors, significantly eroded a traditional source of income for brokers.
As reported by Reuters, a February research note from J.P. Morgan highlighted that many brokers are now looking to recoup this lost revenue by tapping into the substantial income generated by ETF expense ratios. ETF managers collectively collect tens of billions of dollars annually through these expense ratios. The J.P. Morgan note projected that brokers could potentially capture between 10% and 20% of this ETF expense ratio revenue in the coming years.
The question then becomes how brokers incentivize ETF issuers to share this revenue. One approach, as seen with Fidelity and potentially Schwab, is to introduce direct costs for investors when the issuer refuses to pay. This creates a disincentive for investors to choose ETFs from non-paying issuers, indirectly pressuring those issuers to engage with the broker’s fee structure.
Another strategy, employed by Morgan Stanley and potentially J.P. Morgan, is the threat of platform exclusion. By making an ETF unavailable to its vast customer base, a broker can exert significant pressure on an ETF issuer to comply with their demands. The portability of ETFs across different investment platforms has long been a key advantage, and the prospect of losing access to a major brokerage’s client base is a powerful bargaining chip.
This evolving dynamic suggests that the "death of commissions" might not be the end of transaction-related costs for ETF investors. Instead, it could be ushering in a new era of "behind-the-scenes" fees, where the ultimate cost is borne by the investor through service charges or limited investment choices, mirroring the very commissions that were supposedly eradicated.
Navigating the New Landscape: Brokerage Stances
In an effort to provide clarity for investors, NerdWallet has actively surveyed brokers regarding their practices concerning back-end ETF fees. The responses and disclosed policies offer a glimpse into which firms are likely to introduce investor-facing fees or platform restrictions in the future.
Brokers who have explicitly confirmed that they do not charge a back-end ETF fee are generally considered less likely to implement consumer-facing transaction fees or platform bans on ETFs. This is because their existing business models are not reliant on such revenue streams, and introducing them could disrupt customer trust and loyalty.
Here’s a breakdown of where various brokers stand:
No Back-End ETF Fee
These brokers have affirmed that they do not charge ETF issuers a back-end fee, making them less likely to introduce investor-facing fees or platform restrictions related to ETF issuer payments:
- Firstrade
- Cash App
- Public.com
- Robinhood
- eToro
- Merrill Edge
- SoFi
- TradeStation
- tastytrade
- Vanguard
- M1 Finance
Back-End ETF Fee, Non-Paying ETFs May Be Subject to Transaction Fees
Fidelity currently falls into this category, with a service fee applied to investor purchases of ETFs from issuers who do not pay a platform fee.
Back-End ETF Fee, Non-Paying ETFs May Be Excluded from Investment Platform
J.P. Morgan Self-Directed Investing is listed here, with the potential for platform exclusion of non-paying ETFs, though no such instances have been confirmed. Morgan Stanley, as the parent of ETRADE, also has this policy, but ETRADE has not demonstrated such exclusions publicly.
Have Not Yet Responded to NerdWallet Inquiries About Back-End ETF Fees
The following brokers have not yet provided definitive responses regarding their back-end ETF fee policies:
- Webull
- Interactive Brokers
This developing situation underscores the importance for investors to stay informed about the fee structures and policies of their chosen brokerage firms. While the promise of zero commissions has been a significant boon, the financial realities of the brokerage industry are leading to a recalculation of how these services are funded. The era of entirely free ETF trading may be evolving, and investors should be prepared for potential new costs or limitations as the landscape continues to shift.
