E*Trade Launches Zero-Cost Funds Exclusively for Clients

E*Trade, part of Morgan Stanley, is gearing up to offer a range of free funds, but there’s a catch—they’re only accessible to clients using the brokerage platform.

In a recent filing with the Securities and Exchange Commission, the firm disclosed its plans for five zero-cost mutual funds covering both stocks and bonds. These funds will be exclusively available to investors who hold a “self-directed account” at E*Trade through Morgan Stanley.

Taking a page from Fidelity Investments, who introduced zero-fee index funds for their brokerage clients in 2018, E*Trade aims to attract investors with these no-cost funds. While offering a fund without any expenses won’t generate profits directly, it can draw in investors who may later engage with other paid services. This strategy seems to be the logic behind Morgan Stanley’s move, as per Bloomberg Intelligence analyst Eric Balchunas.

E*Trade’s initiative signals a competitive landscape among trading platforms, which have seen the emergence of several fintech firms challenging traditional brokerages in recent years. With various options available for investors to consider, E*Trade joins the fray with this customer-focused approach.

The planned funds from E*Trade include options like the E*TRADE No Fee Large Cap Index Fund and the E*TRADE No Fee Municipal Bond Index Fund, offering investors a diversified portfolio to choose from. These funds align with the growing trend of zero-fee funds introduced by Fidelity, as seen in the success of their Fidelity Zero Total Market Index Fund, which now manages close to $26 billion in assets.

While the direct impact of free funds on client acquisition remains uncertain, the substantial growth these funds have achieved is noteworthy in the industry. According to Morningstar Research Services, offering “loss leaders” like these funds can entice clients to stay and explore additional services, contributing to overall growth and client retention.

As the competition in the brokerage industry heats up, E*Trade’s no-cost fund lineup aims to attract and retain clients by offering an enticing starting point for investors to engage with their platform.