EVEN DAY TRADERS SHOULD HAVE A STABLE of longer-term investments. With the burgeoning of exchange-traded funds, which let an investor trade entire portfolios of stocks in a single transaction while avoiding many of the pitfalls of mutual funds, several services have been created that provide advice and guidance for long-term investors for far less than traditional brokers charge.
ETFs are a good way to tap into a particular market or sector. For example, a share of the Nasdaq 100 Trust (ticker: QQQQ), gives the holder a fraction of a share of each of the 100 stocks that make up that index. And they’re an efficient way to invest overseas. Indeed, the ishares MSCI EAFE Fund is the third-biggest ETF, after the S&P 500 Index (SPY) Spyders and QQQQs.
You can make regular purchases of ETFs in your usual online brokerage account, whether it’s a taxable account or your IRA. You’ll be subject to the normal stock commission, and end up figuring out the proper balance of investments on your own.
Two companies offer an alternative to that conventional approach: ShareBuilder’s PortfolioBuilder (http://www.sharebuilder.com) and Amerivest (http://www.amerivest.com), a unit of Ameritrade. Both offer investing advice, a departure from the usual online broker tack of handing you the tools to construct your own portfolio.
ShareBuilder, which started out using the name NetStock, has built a business through partnerships with banks, credit unions and large employers that has made it a nearly ubiquitous presence. The firm offers an advisory tool for its customers called PortfolioBuilder Plus. Based on the customer’s responses to a series of questions, such as views about risk, time frame for the investment, and how much money is available for investing, PortfolioBuilder Plus recommends a set of ETFs. ShareBuilder customers can also purchase stocks in dollar amounts, rather than on a share basis, if they choose. For instance, you can pick up $100 per month of Google (GOOG) stock.
After the program determined that my risk level was “Moderate,” I told it that my target was retirement income more than 10 years from now, and that I had $250 a month to put away. PortfolioBuilder Plus then recommended that I put $62 into the Lehman Aggregate Bond Fund (AGG) and $188 into Spyders. Doing this would cost $8 a month if I’d signed up for the Basic Plan, which lets you make investments at $4 per transaction. Alternatives are the Standard Plan, which costs $12 per month for up to six automatic investments, or the Advantage Plan at $20 a month for up to 20 automatic investments. Note that an $8 fee equals 3.2% of the monthly target investment of $250, nearly as much as the load on the typical broker-sold mutual fund. But of course that percentage would shrink with bigger purchases.
You must open a ShareBuilder account, even if it’s not funded, to check out the PortfolioBuilder recommendations. Amerivest, however, lets you use its tool without having an account yet open. Its recommendations, given a similar scenario to the one I painted for ShareBuilder, were very different. Amerivest’s initial recommendation: Invest a large lump sum immediately that is likely to give you the results you want at your target date; if you’re not able to put that amount away today, it tells you how much you’ll need to invest annually to get there.
The Amerivest questionnaire also determined that my risk level is “Moderate,” yet the portfolio it recommended was considerably more detailed than ShareBuilder’s. It recommended seven ETFs to buy now, ranging from domestic and international-stock funds to two Treasury-bond funds.
Rather than charging per transaction, Amerivest hits you for a percentage of your total account value. (You can make as many transactions as you want to rebalance your account.) The annual fee for accounts of $100,000 or more is 0.35%; for $20,000 to $99,999, it’s 0.50%, while accounts below $20,000 are charged the lesser of $100 or 2.95%. Amerivest requires customers to keep at least $300 in cash in the account, and it collects its fee every quarter.
Amerivest recommended that I purchase seven different ETFs per month. Assuming I started out with $50,000 in the account, and added $500 a month, I would end up paying approximately $270 in fees the first year, on top of the expense ratios of the ETFs. I’d pay $240 (0.48%) per year at ShareBuilder for the same sort of transactions, although I might run into additional charges if I did some extensive rebalancing.
Strangely enough, it appears that Amerivest is a better deal for the smaller portfolios, since the maximum yearly charge for accounts under $20,000 is $100. And the Amerivest site looks like a technological achievement, compared with ShareBuilder’s. The graphics are more compelling, and the reports are beautifully formatted.
If you regularly invest in small, discrete amounts, and you want to follow the advice proffered by ShareBuilder, you’d be better off buying equivalent low-cost, no-load index mutual funds, such as the Vanguard Total Bond Market Index (VBMFX) and Vanguard 500 Index (VFINX) funds. Although you’d need $3,000 to open an account and you’d have to add at least $100 at a time to each, you wouldn’t have to pay transaction fees; their expense ratios also are just 0.18% to 0.20%. (Vanguard index funds with balances under $10,000 are subject to an annual $10 maintenance fee.) Fidelity’s suite of index funds are even cheaper (0.10% expense ratio), but require higher minimums.
Online Broker News
E*TRADE FINANCIAL (ET) RECENTLY PICKED UP low-cost broker BrownCo from J.P. Morgan Chase, and will fold BrownCo’s 200,000 active traders and nearly $30 billion in assets into its online brokerage unit. BrownCo’s account holders have tended to keep very fat balances—$145,000, the second-highest in the industry, according to E*Trade.
Based on comments that have hit the Electronic Investor’s mailbox, many Brown customers aren’t happy about the coming changes. Unlike Harrisdirect clients, who also will be absorbed into E*Trade, Brown customers face significantly higher fees—unless they vote with their feet and leave.
Andrew Fishman, president of the Schonfeld Group (http://www.schonfeld.com), which caters to active traders, sees E*Trade and Ameritrade continuing to leverage operational and technological economies of scale by adding more accounts via acquisition. But Fishman wonders how the two firms will continue to expand once the industry’s consolidation has run its course.
Separately, Charles Schwab eliminated fees that were driving customers away. Effective Oct. 1, Schwab will no longer charge low-balance account holders a maintenance fee, which had cost those with account balances under $25,000 from $120 to $180 a year. Schwab also announced that it would no longer charge low-balance customers an “order-handling fee” of $3 per equity trade.
Fidelity followed suit by eliminating the $50 annual fee it had been charging clients with less than $25,000 in their accounts. This cut came on the heels of major cuts to options-pricing, implemented in May.
Barron’s readers have long complained about hidden fees and account-maintenance charges. Schwab apparently realized that nickel-and-diming customers isn’t the way to keep them around.