Degiro initiates UK broker 'price war' with commission-free ETFs

However, the UK market could be set for a shake-up with the news that ultra low-cost broker Degiro has launched partially commission-free trading on more than 700 ETFs. Degiro's offer will only apply to the first transaction clients place in a month, but they will be able to purchase as many ETFs as they like within that transaction. Investors will also be able to trade ETFs for free for any transaction above €1,000 (£774.70).

The Dutch broker, which launched in the UK last summer, has already had a big impact on the market through offering the cheapest share dealing rates available.

Gijs Nagel, director at Degiro, says that his company is able to compete aggressively on price because of its lean, financial technology (fintech) focused approach.

"Retail investors are still being ripped off in comparison to institutions. We want to continue to democratise the retail trading industry and as we grow, share our success with clients. Offering free ETF trading levels the playing field even more," he says.

However, he admits that most of the company's clients typically hold stocks in companies rather than ETFs, so trades in these funds make up only a small portion of Degiro's profits.

But Mr Nagel believes that ETFs are a option for long-term private investors to hold as they offer good diversification opportunities.

"We see that a lot of people underperform because they don't diversify enough. We wanted to give the incentive in the right place by offering commission-free ETF trading," he says. "It's a show of goodwill to the clients."

Another relatively new entrant to the UK share dealing market, which is enthusiastic about ETFs, is IG. The online trading company, which also offers private investors access to spread betting and financial derivative products, launched its first share dealing platform in September 2014. It recently ran a two-month commission-free ETF trading offer, which is set to end on 30 April.

PR and sponsorship manager at IG Chris Alfred describes the group as "an evangelist of ETFs", saying that it considers this type of fund to be the best way for investors to get a diversified exposure in their portfolios.

He says: "ETFs are a transparent, easy and low-cost way for investors to get exposure to a market or sector." He adds that as ETFs don't have the drawbacks of certain other types of funds, such as certain types of cost, "they are literally the perfect tool now to use on your investments".

Mr Alfred also says that clients' responses to IG's commission-free ETF trading offer have been very positive and as a result the group is reviewing whether or not it will be able to continue it. If not, rates will revert to the standard £8 per trade fee, or £5 if you trade 10 or more times in a month.

Cost is not the only issue

However, Mr Alfred argues that while cost is important, investors also need to consider the quality of technology their platform offers. And other brokers agree that cost is not the only thing investors need to think about when choosing a platform to trade ETFs on.

Jason Hollands, managing director at Tilney Bestinvest, says that he does not see a price war developing between brokers and platforms over commission-free trading on ETFs.

He says: "Temporary offers are often run by new entrants into the market to try and draw in some new business. At the end of the day, people want to know whether they have a sensible fee structure that they're happy with on a more permanent basis, and the right level of functionality on them.

"Our experience is clients do not primarily buy a service on price alone. It's the overall experience - that is to say, do they like the level of information given, the tools and the functionality, and is the price good value for what they're going to get?"

Mr Hollands also thinks it's wrong for brokers or platforms to favour one form of investment type over another by offering different transaction costs for different assets.

"We don't distinguish between the type of instrument," he says. "So, whether you hold a fund, an ETF or an investment trust, our trading fees are a flat, single-rate of £7.50."

"Different pricing simply recreates a fee structure that biases commercially in favour of one type of investment structure - that is to say, it's much more lucrative for the broker to encourage people to buy funds instead of ETFs, for example. So we've gone for a structure that we hope is simpler."

Mr Nagel believes UK brokers and platforms have been slow to react to Degiro's throwing down of the gauntlet on low dealing fees and doesn't expect to see more brokers and platforms offering commission-free trading on ETFs.

"We always said from the beginning that we're going down in price - we're not going up," he says. "And that's been the case in the 17 countries we've entered. We've just begun the price war in the UK."

Fund platforms ETF trading charges

Source: provider websites