A closer look at free ETF trading – National Bank Discount Brokerage vs. Questrade
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A few days ago, a reader asked:
I’m just wondering if you have any comments on Questrade vs. National Bank Discount Brokerage for commission free ETFs. Do you think one is better than another?
As some of you may have heard, National Bank Discount Brokerage recently announced that they are elimination ETF transaction fees.
What does this mean? Upon a closer look I discovered the following key points:
- Commission free ETF trading is only for Canadian listed ETFs
- Minimum of 100 shares per trade is required
- No restrictions are placed with respect to account size or number of transactions
- For US listed ETFs, commission fee is $9.95 per trade
Meanwhile, Questrade has been offering free commission when buying ETFs for a few years. A bit on Questrade’s commission free ETF trading:
- Commission free when buying ETFs
- $4.95 commission when selling ETFs
- Electronic communication networks (ECNs) fees may apply
National Bank Discount Brokerage vs. Questrade
If you’re a casual investor like myself, which brokerage account is better?
A bit of background first. While we invest primarily in individual dividend paying stocks, we do hold index ETFs in our dividend portfolio and RESPs. For RESP we are utilizing Canadian Couch Potato’s Vanguard model portfolio.
For our dividend portfolio, we usually buy a few shares of ETFs each time using the left over cash from DRIPs. For RESP, we contribute $2,500 per year for each kid and use the cash to re-balance their index portfolios (3 and 5 ETF funds respectively). In both scenarios, we rarely buy more than 100 shares per trade. Furthermore, for Baby T1.0’s RESP, we are trading US listed ETFs like VTI and VXUS.
If we were using National Bank Discount Brokerage, our ETF buying habits mean we won’t qualify for commission free ETF trading. We would be paying $9.95 per trade.
On the other hand, if we were using Questrade, we can purchase both US and Canadian ETFs commission free. There’s no restriction on how many shares we need to purchase each time. We can buy as few as one share and build up the portfolio over time.
In our case, Questrade is the better discount broker to use.
However, if you buy and sell ETFs in 100 shares or more regularly, National Bank Discount Brokerage might be the right choice for you.
What is ECN fee?
It can be a bit confusion when purchasing ETFs with Questrade, because you may be subject to ECN fees. As you can see below, ECN fees are applied on per share basis. Since ETFs are typically greater than $1, the ECN fee is $0.0035 per share on Canadian listed ETFs and $0.004 per share on US listed ETFs.
It’s a very small amount if you think about it. If you were to purchase 100 shares, that’s $0.35 for Canadian listed ETFs and $0.04 for US listed ETFs
How to avoid ECN fees with Questrade?
As you can see from the table above, ECN fees do not apply on every trade. They are only charged when a buy or sell order removes liquidity.
Huh? What the heck does removing liquidity mean?
If your order is filled immediately after you place it, you’re removing liquidity. So if you place a market order, you will be charged ECN fee. This also includes any limit orders where you set a price that is either above the ask (when buying) or below the bid (when selling) price. Just like a market order, these limit orders will usually be filled right away, so Questrade will charge you ECN fees.
So how do you avoid ECN fees when using Questrade?
Simple. When buying, place a limit order with a price that is lower than the ask; when selling, place a limit order with a price that is higher than the bid. Since these orders are not likely to be filled immediately, they are considered as adding liquidity to the market. So when these orders are filled, Questrade won’t charge you ECN fees.
Confused? Please allow me to give a quantitative example.
Imagine we’re trading VCN, Vanguard Canada All Cap Index ETF. The quote looks like this on Questrade:
- Last: $28.95
- Bid: $28.97
- Ask: $29.00
- Vol: 17.80k
- Bid Size: 159
- Ask Size: 120
In this example, the ETF is currently trading at a price of $28.95 with $28.97 bid and $29.00 ask.
If we are looking to add VCN in our portfolio and want to pay $0 commission and $0 in ECN fees with Questrade, we would place a limit order below the ask price. For example, we would place a limit order at $28.96. Since our order will not be filled right away (assuming the bid & ask do not change quickly), and we are adding liquidity to the market, we won’t incur ECN fees.
Unfortunately, if we are placing an order in odd lots (i.e. not in blocks of 100 shares), we can incur ECN fees.
Why? Because an odd lot can remove liquidity from the market even if we place a limit order with price below the ask price (when buying) or above the bid price (when selling).
So in our case where we often purchase less than 100 shares of ETFs, we will incur ECN fees regardless.
Is this a big deal? I do not think so, given that the ECN fees are such small fractions of the entire purchase. If we buy 10 shares of VCN at $28.96, we would be paying $0.035 in ECN fees, or roughly 0.01% in fees. This is certainly less than if we were to pay $9.95 per trade (~3% in fees) when using National Bank Discount Brokerage.
Considering our ETF trading habits and we’re still in the accumulating phase of our financial independence journey (i.e. buying only, not selling ETFs), Questrade’s commission free ETFs is a way better option for us than National Bank Discount Brokerage’s commission free ETFs offering.
Dear readers, what do you think about my assessment? Do you plan to use National Bank Discount Brokerage given the latest announcement?
PS: Looking to open a Questrade account and wanting to get up to $250 of rewards? Please contact me for referral code. Alternatively you can use my QPass Key 335712213387087 when signing up. You can receive from $25 to $250 of cash reward depending on your account size.