Published in Barron's
Columns and featured published in Barron's.
Monday, June 20, 2005
Over There, Online
AMERICAN INVESTORS INCREASINGLY ARE HEEDING the long-time advice to diversify their portfolios internationally. In the past, that’s meant mutual funds, most of which carry fairly hefty expenses. As with domestic funds, exchange-traded funds have been making major inroads in the global arena. A glance at the size rankings of ETFs shows that the iShares MSCI EAFE Index Fund (ticker: EFA), is No. 3, surpassed only by the Standard & Poor’s Depositary Receipts (SPY) and the Nasdaq 100 Trust (QQQQ).
EFA, which tracks the Morgan Stanley Capital International EAFE (Europe, Australasia and the Far East) Index, provides exposure to the globe’s developed (as opposed to emerging) markets in one fell swoop. And since exchange-traded funds can be bought and sold throughout the trading day, just like a stock, it’s easy to trade. Its expense ratio is a low 0.35%, making it an attractive buy, especially compared with mutual funds that invest abroad, which have an average expense ratio of 1.77%.
THERE IS ALSO AN ARRAY of ETFs that each provide exposure to a single country—say Brazil, or South Korea—as well as regional indexes, which give individuals an efficient means to pinpoint opportunities around the globe.
At MSN Money (http://www.moneycentral.msn.com), check out the ETF section, found under mutual funds. There you’ll find a complete list of exchange-traded funds, broken down by category, including non-U.S., global and emerging-market funds. On the main ETF page, enter a ticker to get a snapshot of a fund from Thomson Financial.
In addition, at MarketWatch (http://www.marketwatch.com), you check the ETF Center. There, the Quick Screener breaks down funds by regions, among other criteria. (Like Barron’s, MarketWatch is published by Dow Jones.)
So far, there aren’t any international fixed-income ETFs, but there are several closed-end funds in this category, most of which trade at a discount. (We’ll examine resources for closed-ends in a future issue.)
There’s more to investing in international equities, of course, than buying and selling ETFs of other funds. Several dozen Barron’s readers responded to our requests for their wish lists and gripes concerning the subject. As always, I’m impressed by the thoughtful responses crafted by those who wrote to our online mailbox; thanks to all of you who took the time to share your thoughts.
Quite a few readers of this column have given international trading a go, only to run into obstacles.
Only one online broker earned a grudging compliment; the rest were found wanting. Among the problems: an inability to submit limit orders in foreign currencies to be executed in foreign markets, and the lack of visible and predictable commission schedules on foreign currency exchanges. Unlike the U.S., where public companies face shareholder-communication requirements, some other lands impose no such rules. Our intrepid explorers found that it is difficult to learn about corporate reorganizations or to get copies of annual reports.
Interactive Brokers (http://www.interactivebrokers.com) has a lot to offer investors in foreign shares. Its “Trader Workstation” provides direct access to stocks, options, futures, foreign exchanges and bonds that can be bought and sold in more than 50 markets in 14 countries, with more on the way. IB’s wide range of offerings and low fees earned it the top spot among direct-access brokers in Barron’s 2005 review of online brokers ("Speed or Comfort,” March 7.)
To trade abroad, a U.S.-based customer would open an account in dollars, then generate a margin loan in the foreign currency. To eliminate the loan, the customer has to trade currencies through the IB IDEAL network, or deposit funds in another currency.
One Barron’s reader who responded to our e-mail request for comment on international-trading experiences said he had executed more than 100 trades since opening his account last fall, and noted that IB offers, “very low commissions, powerful trading software with available data feeds from many countries, excellent currency contracts, low-cost margin and three types of excellent help services.”
On the downside, our reader comments that IB seems interested in professional traders, not amateurs. He says that the company’s software is solid, frequently upgraded with features that clients ask for, and is very flexible, with quite a bit of trade-oriented reporting—but it doesn’t have much in the way of long-term investment analysis, or links to research. “It’s called Trader Workstation, with the emphasis on Trader,” he concludes.
Several readers who have traded Canadian stocks are customers of TD Waterhouse (http://www.tdwaterhouse.com), owned by Toronto-Dominion, the big north-of-the-border bank. One wrote in with a list of pros and cons. Prominent among the cons was that a customer couldn’t trade Canadian securities online—orders must be placed by phone, and charges are higher than they would be if the transaction is done over the Internet.
Several Charles Schwab (http://www.schwab.com) customers complained about buying or selling shares through its international desk, because they had to do so by phone and pay fees that they viewed as on the high side.
A Uruguay-based Schwab customer complimented the firm’s Spanish-language assistance, noting that he had tried to open an Ameritrade (http://www.ameritrade.com) account as well, but ended up closing it, owing to a lack of help in Spanish. However, this customer complained about Schwab’s lack of transparency in online bond trading, lack of international bonds and lack of currency trading. Plus, as noted, the international trades had to be conducted over the phone, rather than online.
E*Trade has branded Websites in 12 countries. Outside the U.S., those sites let customers trade in their own local markets, as well as on U.S. exchanges. But Americans still can’t “cross the borders” and place trades on foreign exchanges.
JARRETT LILIEN, E*TRADE’S president and chief operating officer, plans to launch an International Center on the Website that is similar to the existing exchange-traded fund center. He says that customers will be able to get quotes and content, and information on American depositary receipts and international ETFs. “Eventually, we’ll have direct access to international markets on that tab,” Lilien adds.
Lilien came to E*Trade in 1999, after it purchased his firm, TIR Securities. TIR was headquartered in Hong Kong, and focused on the institutional markets, with trades being placed on 35 exchanges around the world. He says that 68% of E*Trade customers surveyed said they’d like to place international trades, and he likens the current interest in international trading to that in options just a few years ago.
According to Lilien, E*Trade’s current infrastructure, with internal order-routing, gives it a direct connection to the exchanges. Before year’s end, he would like to add five or six global markets where customers can have direct access, and is considering Canada, the U.K., Germany, France, Hong Kong and Japan. His vision is to offer direct access to all global markets, and to facilitate trading and investing on local exchanges.
Published in Barron’s June 20, 2005
Monday, June 06, 2005
Engaging Possibilities
THE MATING DANCE CONTINUES among online brokers. Ameritrade (Ticker: AMTD) and Canada’s Toronto-Dominion Bank (TD) confirmed last week they are discussing a deal involving TD Waterhouse, TD’s online-brokerage subsidiary. The companies would offer no other comment.
The potential takeover of TD Waterhouse by Ameritrade has been a staple of the rumor mill since last fall, but this is the first time the two companies have acknowledged that they’re talking over the possibilities.
Although TD Waterhouse has made some improvements to its Website of late, it hasn’t kept up with the pace of innovation in the industry. From the viewpoint of a Waterhouse customer, an Ameritrade takeover would result in improved trading tools and, in general, lower fees. But it’s unclear whether Waterhouse’s extensive network of brick-and-mortar offices would be retained by Ameritrade, which has expanded by absorbing the technology and online customers from rivals such as Datek.
Ameritrade recently rebuffed a takeover offer from E*Trade (ET), but Ameritrade’s overture to TD Waterhouse may spur E*Trade to raise its bid for Ameritrade, according to one analyst quoted by Dow Jones Newswires. Ameritrade, for its part, has indicated its desire to remain independent. Another analyst opined that if TD Waterhouse doesn’t link up with Ameritrade, Charles Schwab (SCH) could take it over.
What’s certain is that consolidation will continue until the excess capacity in the online-brokerage industry is absorbed. In the meantime, the competition for your commissions and assets will remain intense. In that regard, Wells Fargo (WFC) last week announced it was slashing commissions for its online-brokerage unit, especially for high-net-worth customers. Accounts with over $250,000 get 50 free trades a year while those between $100,000 and $249,999 get 50 trades a year at $2.95 apiece. After that, they pay the same fee charged to accounts under $100,000, which is now $9.95.
Meanwhile, San Francisco-based PreferredTrade (http://www.preferredtrade.com), which offers direct-access electronic trading of options, stocks, futures, and basket trade executions for individuals, option floor traders, and institutions, is the most recent online brokerage to be taken over. The twist is that the buyer is the Fimat Group, the global brokerage unit of Société Générale, the giant French bank.
The acquisition of PreferredTrade, a self-clearing broker-dealer, gives Fimat memberships in the major U.S. equity markets. Fimat Preferred has been set up as the company to house the assets acquired from PreferredTrade; closing is tentatively scheduled for this summer.
Spreading the Wealth
OptionsXpress (http://www.optionsxpress.com) (ticker:OXPS) introduced Xspreads back in 2002, which allowed customers to trade spreads among themselves. The new version of Xspreads posts spreads in an electronic spread book executed through the International Securities Exchange and other broker dealers and exchange participants, which offers opportunities for price improvement on spread trades.
Spreads, which are strategies that help investors better manage risk and reward, involve buying or selling a mix of two or more different options. The Xspreads order-entry screen is essentially an RFQ (request for quote) process.
“We’re able to send the order to several liquidity providers before it hits the exchange,” says David Kalt, optionsXpress’ CEO. “The liquidity providers respond immediately. Typically when you execute a spread, the natural bid/ask can be 25 to 30 cents wide. This feature tightens it by a nickel on each side.”
What does this mean for a spread trader? A dime on a two-legged spread trade of 10 options is a couple hundred dollars, which improves your returns significantly.
With the new capability, Xspreads shows investors where opportunities for price improvement may exist before spread trades are placed, potentially saving optionsXpress’ customers hundreds of dollars per trade.
Schwab Updates StreetSmart Pro
In recognition of a 54% increase in the average number of daily options trades placed over the last six months, Schwab announced that it has added multileg options strategies to StreetSmart Pro, its platform for frequent traders.
Once the upgrade rolls out in July, StreetSmart Pro users will also have access to streaming quotes and news, interactive charting, and additional research.
While waiting for the new features, Schwab customers can take advantage of lower commissions for options trades. The base fee is now $9.95 per transaction, plus 75 cents to $1.40 per contract, depending on the number of trades placed per quarter or the balance held in an account. Customers can place trades via a live broker for an additional $30 per transaction.
Managing Medical Expenses
Over at Intuit (INTU), an employee’s family crisis led to the creation of a new product that fills a gap in the personal-finance universe.
Quicken’s Medical Expense Manager, written by an employee who was trying to stay on top of the huge pile of bills generated by his daughter’s open-heart surgery, lets you create a medical history for each family member—including pets. When you enter a bill, the program lets you know whether you’ve been billed for this before, how much insurance will pay, and what you should do next.
It’s a stand-alone product, which does not currently feed into either Quicken or TurboTax—although the company says they’re discussing those possibilities for future editions. Quicken Medical Expense Manager generates a figure you can enter in TurboTax for medical expenses, however—plus it helps you calculate your mileage deduction.
The Medical Log tracks each family member’s visits to doctors and other medical professionals, along with prescriptions and renewal information. The downside of the program is that its current incarnation requires quite a bit of manual-data entry, especially during the setup process. In that regard, it reminds me of using Quicken back in the early 1990s.
After playing with the program for a couple of weeks, I find it more and more useful for my personal situation. I’m now dealing with a condition that involves multiple prescriptions, second and third opinions from surgeons, and other experiences I’d just as soon avoid. However, Quicken Medical Expense Manager is helping make sense of it all, at least from a financial point of view.
You can download the program for $49.99 from http://www.quicken.com.
Published in Barron’s June 6, 2005
Monday, May 23, 2005
Trading Online Brokers
INVESTORS WHO TYPE http://www.ameritrade.com in their Web browser may wonder what may pop up in the future. Datek, J.B. Oxford or National Discount Brokers customers already know how it feels to log on to their accounts and end up at a different Website from the ones they were expecting. And again the rumblings of realignment are being felt in the online-brokerage industry.
More than seven years ago, we expected “shrinkage in the numbers of Internet brokers out there. Consolidations and shakeouts seem all but certain in this crowded marketplace” (Barron’s, “Beyond Cool,” March 16, 1998). Two years later, when concluding the annual review of online brokers, a peek into our crystal ball revealed this industry forecast: “Several smaller brokers reportedly are up for sale, while other aggressive firms are burning cash furiously to buy market share. Look for consolidation in the industry.” ("Better, Not Just Bigger,” March 13, 2000.)
We were a few years ahead of the game, as it turns out. The industry ballooned to approximately 150 online brokers in 2000, just before the bubble burst, when it seemed that everyone was getting into the act.
Ameritrade went on a buying spree that took off in 2002, and after absorbing several erstwhile competitors, seriously improved its online offerings. Industry insiders have reported for a few months that Ameritrade and TD Waterhouse are talking about a merger.
On May 9, the news hit that E*Trade Financial had made an offer for Ameritrade, which the latter publicly turned down on May 12. “With seven merger-and-acquisition transactions in the past four years, Ameritrade is a leader in consolidating this industry,” said Joe Moglia, chief executive officer, in a statement. “ We will continue to explore strategic opportunities, basing our decisions on whether a transaction will enhance shareholder value and benefit our clients.”
“The board believes there will likely be further consolidation in the industry, but confirmed Ameritrade is not for sale,” adds Joe Ricketts, founder and chairman.
Are they just being coy in order to drive the price higher, or will Ameritrade continue to fly its own banner? Time will tell. In the meantime, it’s obvious that mergers and buyouts will be prevalent in the industry, as firms deal with reduced trading activity.
Officials at other brokers weighed in on the issue of industry consolidation. “We’re watching the situation and keeping an eye on it, but being privately held, we’re in a different league,” says Kelly Doria, Scottrade’s director of corporate communication. “We’ll keep doing what we’ve been doing, which is focusing on our customers. It’ll be interesting to watch and see what happens in the next few weeks.”
“We see it as opportunistic,” says David Kalt, optionsXpress’ chief executive “When you see a big deal like this one go through, it diverts the consolidating companies’ attention and will create some opportunities for us. We have historically benefited from consolidations in the past.” He adds, “We benefited hugely from Ameritrade/Datek consolidation,” which took place in 2002. Schonfeld Group President Andrew Fishman, whose firm does extremely high volume in the short-term-trading space, says the possible merger would not affect his firm. But he notes, “If E*Trade drops the ball, there will be some opportunity for my company to pick up some of their more active traders.” From figures supplied by Graham Mudd of comScore Networks, it appears that there is little overlap between E*Trade and Ameritrade’s customer bases. Mudd says that only 3% of the total 2.36 million unique visitors to these two sites visited both sites in March 2005.
Although consolidation is likely to characterize the year 2005, competition is a good thing for end-users. My initial reaction when I heard the rumors was disappointment—Ameritrade is doing so many things right these days that I’d hate to see its site completely disappear.
“Ameritrade’s site is so nice now,” optionsXpress’ Kalt says. “If E*Trade is focusing on banking, I think it will be a struggle to see which system prevails. To get the complete financial-services solution they’ll have to fold one of them.”
Based primarily on letters readers have sent to The Electronic Investor’s mailbox, I would guess that E*Trade and Ameritrade attract customers who are very similar in terms of portfolio size and trading styles—fairly well-heeled independent types—and that their customers have made deliberate choices to go with one or the other. I can imagine that current Ameritrade customers would be unhappy about being swallowed up by E*Trade, which could lead to an exodus if such a huge consolidation wasn’t done right.
If you’re worried that your online broker might be the Jonah in a takeover, consider the firms that appear to be immune from acquisition. Scottrade has firmly stated its intention to remain private and independent. Fidelity has pumped so much into its customer offerings and service makeovers in the past year that it looks safe. And Schwab’s size makes it an unlikely takeover target.
Of course, I thought Ameritrade was also safe, owing to its size and market positioning. So much for my crystal ball. As the Laws of Forecasting states, “He who lives by the crystal ball soon learns to eat ground glass.”
Scottrade’s Makeover
As this issue of Barron’s hits the streets, a redesigned version of Scottrade’s Website (http://www.scottrade.com) is hitting the Internet. Says Kevin Dodson, Scottrade’s manager of online trading platforms: “We brought in features and functionality requested by our customers. We’ve been testing the new site for 11 months now, going through multiple iterations of the redesign with actual customers.”
Navigation has been seriously streamlined, with just four tabs—labeled Home, Trade, My Account and Quotes & Research—across the top of the screen, as opposed to the nine tabs in the current system. The menu displayed on the left side of the screen changes based on which tab has been selected at the top.
The new home page displays an overview of a customer’s holdings and activity, as well as communications from the broker. Specific notices regarding the account are displayed at the top of the list, followed by Scottrade’s broadcasts below. One feature, the “quick-quote widget,” follows the customer through the site.
The main reason the number of tabs has been cut from nine to four is that all of the trading activity takes place under the “Trade” tab. The old Website had a tab for each type of trade—you’d click “Trade Stocks” or “Trade Options,” for example. This streamlining makes the site considerably easier to use.
The enhanced Website rolled out after the close of the market on May 19. The old site will still be available throughout the summer. “We’re giving people a transition over to the new site, while letting them use the old site if they’re more comfortable there,” Dodson says. He expects to shut the door on the old site by end of summer.
Published in Barron’s May 23, 2005
