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Nasdaq tries for brokerless ETFs

NEW YORK - Folks who prefer to invest small amounts of money at regular intervals have often avoided exchange-traded funds, which incur commissions each time a trade is executed.

To change that, the Nasdaq Stock Market is working to allow investors to buy shares of the Nasdaq-100 Index Tracking Stock Trust ETF directly from the stock market - removing the broker from the equation.

"This is a very inexpensive, Web-based program that allows investors to directly send money in and have the trust pick up as much of the expense as possible," said John Jacobs, chief marketing officer at Nasdaq. The plan "creates a mechanism for the dollar-cost-averaging investor to invest in ETFs," he said.

The program, which Jacobs hopes will be up and running by the third quarter, is intended to target small investors who don't have a brokerage account but want to invest directly in ETFs. Investors will pay $1 or $2 at most per trade, dramatically less than most brokerages charge. The QQQQ trust will assist with the transaction costs.

ETFs, which resemble index-tracking mutual funds, trade on an exchange throughout the day like stocks and have been touted for their low costs, flexibility and tax efficiency. However, because they are bought and sold through brokers, commissions are charged each time a trade occurs, making it less appealing to investors who dollar-cost average, or invest in small, regular increments. Those investors are often better off with traditional mutual funds.

Here's how the program will be set up: Investors will send money to a "direct purchase" program, where it will accumulate. After a certain point - Nasdaq is exploring the frequency of these transactions - the money will be directly invested in the QQQQ trust, sans broker.

While this type of direct purchase program has never been done with ETFs, the concept isn't new. Several funds and companies offer similar programs that allow investors to send in money or reinvest dividends until they have amassed a certain amount. The money is then invested in the fund or stock, and the administrative expenses are absorbed by the fund or company.

"What we want to do is recreate that," Jacobs said.

If the program, a joint effort by Nasdaq and a partner who Jacobs declined to name, is successful, Jacobs expects it will be expanded.

[Last modified July 22, 2005, 00:32:15]