Archives for February 2013

Free $5 Gift Card for Joining Starbucks Rewards

Starbucks is offering a free $5 gift card for new members of their Starbucks Rewards program that register a Starbucks (gift) card. If you don’t have one, you can either buy one from a physical store or use their mobile app. Ends 3/15/13.

Indeed, the easiest way to get a free $5 gift card is to download their smartphone app (Android/iOS) and sign up for a new account via the app. When asked to register a card, choose to “Get a Mobile Starbucks Card”. You may need to wait a few minutes, but the card should eventually get credited with $5 without having to load it with your own money. Free caffeine, good for at least two iced coffees with milk per person! 🙂

iShares Core ETF List: Lower-Cost Index ETFs for Buy-and-Hold Investors

The index fund fee wars continue… You may or may not know that Blackrock’s iShares is the largest ETF provider in the world, with over 250 US-listed ETFs and the largest asset base by a good margin. iShares ETFs tend to have big volume and are the favorites of Wall Street traders and also large money managers. But Vanguard is catching up, and iShares responded by making a move in October 2012 to appeal to long-term, buy-and-hold investors who want low-cost, broad, index ETFs. (I’m sure they also saw how people who wanted Emerging Markets exposure quickly switched from EEM to VWO due to the big fee difference.) See the official iShares press release for more details.

Below are the 10 ETFs that comprise the new iShares Core Series ETFs (4 new, 6 modified existing), along with their expense ratio, ticker symbol, and benchmark index. They are broken down into 4 US equity ETFs, 3 International equity ETFs, and 3 US bond ETFs.

Fund name (Ticker) Expense ratio Benchark
iShares Core S&P Total U.S. Stock Market ETF (ITOT, previously ISI) 0.07% S&P Composite 1500
iShares Core S&P 500 ETF (IVV) 0.07% S&P 500
iShares Core S&P Mid-Cap ETF (IJH) 0.15% S&P MidCap 400
iShares Core S&P Small-Cap ETF (IJR) 0.16% S&P SmallCap 600
iShares Core MSCI Total International Stock ETF (IXUS) 0.16% MSCI ACWI ex USA IMI
iShares Core MSCI Emerging Markets ETF (IEMG) 0.18% MSCI Emerging Markets IMI
iShares Core MSCI EAFE ETF (IEFA) 0.14% MSCI EAFE IMI
iShares Core Total U.S. Bond Market ETF (AGG) 0.08% Barclays U.S. Aggregate Bond Index
iShares Core Long-Term U.S. Bond ETF (ILTB, previously GLJ) 0.12% Barclays U.S. Long Government/Credit Bond
Index
iShares Core Short-Term U.S. Bond ETF (ISTB) 0.12% Barclays U.S. 1-5 Year Government/Credit Bond Index

The new expense ratios are very competitive with the corresponding Vanguard ETFs, usually within a few basis points. It would have been nice if they just lowered the fees on EEM instead of starting a whole new ETF IEMG, but remember that profit motive. The ETFs are gaining reasonable assets, so it appears to be a successful move so far.

For the individual investor, it will be interesting if iShares strikes a deal with a major brokerage firm to offer commission-free trades on these ETFs. Update: These Core ETFs are now part of Fidelity’s commission-free iShares ETF list .

Fidelity Freedom Funds Review: Avoid High Cost Target Date Retirement Funds

Updated and revised. Fidelity Investments does a lot of things well, but their Fidelity Freedom series of target-date retirement funds is not one of them. I’ve been warning people about these funds since 2006, although recently they’ve been getting some heat due to their overall underperformance. Assets in the Freedom funds have been dropping, while the assets in Vanguard’s Target Retirement funds have been increasing quickly. Here’s why the underperformance is not about the glide path, but about the structure and fees.

This post is a bit long, so here’s a roadmap of what I’m going to try and show:

(1) The goal of owning actively-managed mutual funds is to beat their passive benchmark. Pick the winners and not the losers. The problem is that Fidelity Freedom funds hold so many different funds with overlapping holdings, that in the end they basically own everything. It’s exceedingly difficult for them to accomplish such outperformance. Thus, over time their performance before fees is likely to simply match that of their benchmark.

(2) Due to their higher expenses, this means that their net performance after fees (what investors actually get) will be very likely to underperform the their benchmark. Over long periods of time, the amount of underperformance will closely match the amount of management fees charged.

(3) This expected underperformance is confirmed by looking at their historical performance over the past 3, 5, and 10 years.

(4) Instead, investors should look for low-cost index funds to replicate the benchmark give the best chance of higher performance. Options are explored.

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Fidelity Spartan Index Mutual Fund Fee Reductions, Lower Minimum Investments

Fidelity Investments made some cost-cutting moves recently to try and keep their index fund products competitive (full press release). This comes at the same time that their actively-managed equity funds are seeing large amount of withdrawals, per WSJ:

Investors pulled a net $35.3 billion from equity funds at the country’s second-largest mutual-fund company in 2012, according to Fidelity’s annual report released Friday. Of that total, the Boston-based company’s actively-managed stock funds – an essential component of its business – saw outflows of $24.4 billion during the year. That’s despite the strong performance of the funds, which collectively beat 74% of their peers last year, compared with 53% in 2011, according to Fidelity.

(Also noteworthy: Fidelity filed with the SEC in December 2011 to roll out their own line-up of index-tracking stock and bond ETFs, although I haven’t heard much since. In December 2012, Fidelity filed to start actively-managed ETFs as well.)

Reduced investment minimums. As of December 2012, Fidelity reduced the investment minimums on 22 equity and bond funds, including the 14 Spartan index funds listed below. The Investor Class investment minimum was lowered from $10,000 to $2,500, while the Fidelity Advantage® Class was lowered from $100,000 to $10,000.

Spartan 500 Index Fund
Spartan Extended Market Index Fund
Spartan International Index Fund
Spartan Total Market Index Fund
Spartan Emerging Markets Index Fund
Spartan Global ex U.S. Index Fund
Spartan Mid Cap Index Fund
Spartan Real Estate Index Fund
Spartan Small Cap Index Fund
Spartan Inflation Protected Index Fund
Spartan Intermediate Treasury Index Fund
Spartan Long-Term Treasury Index Fund
Spartan Short-Term Treasury Index Fund
Spartan U.S. Bond Index Fund

This is a pretty big move to bring in more retail investors, becoming more in line with Vanguard’s Investor and Admiral Class shares. As with Vanguard, share class conversions should occur automatically based on your investment amount, and the conversion is a tax-free event.

Lower expense ratios. As of January 2013, Fidelity also cut the overall expense ratios for certain share classes of 8 Spartan index funds. Below is a list of the affected funds and their new expense ratios for Investor/Advantage classes as of 1/1/13.

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Recent Vanguard Index Fund Benchmark Changes = Lower Costs

Recently, Vanguard has made some big moves in the index fund space. Well, they were big for people in the business, but for individual investors it basically boiled down to some simple good news: even lower costs, which happily means larger numbers on my monthly statements.

In October 2012, Vanguard announced that they would be changing the benchmarks on 22 of their index funds from MSCI indices to either FTSE (international) or CRSP (domestic) indices. Essentially, companies like S&P (S&P 500) and MSCI are the “brand names” of the indexing world. However, creating an investable market-cap weighted index has basically become a commodity, so why not go “generic” where available? FTSE is part of a publicly traded company, but CRSP is short for University of Chicago’s Center for Research in Security Prices which is run as a non-profit.

Basically, MSCI wanted too much in licensing fees, so Vanguard dropped them. Remember that with Vanguard’s client-owned structure, the savings goes to the investor and not to shareholders or private owners. This move should result in lower expense ratios in the affected funds as well as the popular Target Retirement 20XX and LifeStrategy funds. Vanguard is taking the transition slowly over several months in order to minimize any capital gains, front-running, or market impact costs. Here is a list of all the affected funds and the new benchmarks. Notable changes include:

  • Vanguard Total Stock Market Index Fund (VTSMX, VTSAX, VTI) will now track the CRSP US Total Market Index. It shouldn’t change significantly, but the new CRSP index does include more micro-cap stock exposure.
  • Vanguard Total International Stock Index (VGTSX, VTIAX, VXUS) will now track the FTSE Global All Cap ex US Index. Here is another nice overview on the Rick Ferri Forbes blog, but basically there will only be slight changes.
  • Emerging Markets Stock Index Fund (VEIEX, VEMAX, VWO) will now track the FTSE Emerging Index. The big change here is that FTSE has South Korea as a Developed market, whereas MSCI still has South Korea as a Emerging market. South Korean stocks were 15% of the MSCI-based ETF, so the new ETF should look a little different. This was going to happen sooner or later, anyway.

Bottom line: Vanguard disrupted the industry again, and others may have to follow eventually. Vanguard already has the asset size and client-owned structure that gives them the ability to maintain the lowest costs in the industry. Other providers may match or even beat their expense ratios, but they are doing it as a loss-leader and hoping to make it up elsewhere. Like milk or orange juice at the grocery store, this means whatever is on sale today may go up in price next week (or year, or decade). The difference is that when it comes to long-term investing, over time you will (hopefully) accumulate significant capital gains and selling them prematurely will results in a tax hit. I don’t want to have to switch investments later on in the game.

Billboard #1 Song In The US is about Frugality?!?

For the 4th week in a row, the #1 song on the Billboard Hot 100 is “Thrift Shop” by Macklemore & Ryan Lewis featuring Wanz. It’s also currently the #1 download on Amazon MP3 Top 100. The song is about… frugality? …buying clothes from Goodwill? …how paying $50 for a brand-name t-shirt is stupid? From Wikipedia:

Macklemore spoke to MTV News about the meaning of the song: “Rappers talk about, oh I buy this and I buy that, and I spend this much money and I make it rain, and this type of champagne and painting the club, and this is the kind of record that’s the exact opposite,” he explained. “It’s the polar opposite of it. It’s kind of standing for like let’s save some money, let’s keep some money away, let’s spend as little as possible and look as fresh as possible at the same time.”

Here’s the YouTube version (some explicit NSFW lyrics!) and also a link to the clean version. Is this a sign? Or is it just a catchy beat like Gangnam style?

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LivingSocial: 20% Off Coupon Code 2/20-2/22

LivingSocial has a new promo code MYFEB which will get you 20% off almost any deal for $100 or less, local or nationwide. Look for “Redeem promo code” during checkout. Valid for first 10,000 uses. Must be used by February 22, 2013, 11:59 p.m. (Pacific Time). Fine print below:

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Links: How to Make Money in the New Share Economy

Forbes has an article about how the share economy is taking off. The primary focus is on AirBNB, which lets you rent out a room in your home with ease and last year booked around 15 million nights of stays. I’ve written about some of these sites before, and while I mostly forgot about them, some people are going quite well with them. “Almost anything you can buy new, you can also rent from a stranger.”

One person lives off of income generated by renting his house out whenever he can (while he cordons himself off to an unattached area). One person makes more money dog-sitting from home than working at Starbucks. One person rented his car out part-time for more than the monthly payments, so now he has three cars being rented out. Yet another drives his car around ridesharing every night and is basically a taxi service. These people may be the exception rather than the rule, but is it proof that the next generation of millennials really don’t care about ownership anymore? Is it better to just have access to whatever you need when you want it? Peer-to-peer everything!

Here’s an infographic from the print version of the article that lists sharing websites of all types from around the world, with the data source being Rachel Botsman of CollaborativeConsumption.com.

Here are links specifically dealing with sites that allow you to make money from your own stuff (US-focused only) – be it a room, a car, or your power tools:

Jemstep Portfolio Manager Review

When I first reviewed JemStep in 2011, it analyzed your current portfolio and made customized mutual fund rankings. Flash forward to 2013, and they’ve moved into the portfolio management and advice space, similar to previously-reviewed sites like Betterment or Personal Capital. Now it’s called Jemstep Portfolio Manager.

After signing into my old account and looking around at the new features, I was happy to see they’ve actually gotten pretty close to my wishlist:

  • Import my existing portfolio directly from broker. Check.
  • Track asset allocation across entire portfolio. Check.
  • Customized rebalancing alerts. Not quite. They do give rebalancing alerts, but only customized to their portfolio recommendations, not my personal chosen preferences. See below.
  • Detailed performance stats vs. benchmarks. Incomplete? I don’t see this, but I haven’t be able to get past the trade recommendations.
  • Reasonable cost. During their initial beta, the service will be free for everyone until March 1st, 2013. After that, the service remains free for those with assets of $25,000 or less. Otherwise see fee schedule discussion below.

Test Drive

The first step is to set a goal. They want things like age, income, target retirement age, risk tolerance, etc. You have provide a preference of mutual funds or ETFs. Given their previous support of actively-managed funds with high recent risk-adjusted returns, I was surprised to see the following:

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A Beach Less Traveled: From Corporate Job to Flip Flop Perfumer – Book Review

The book A Beach Less Traveled sounded like just the thing to read during a winter weekend… an American couple shares about their true story of going from “corporate chaos” to living in a tropical paradise where they run a small perfume shop. I love travel non-fiction, especially the work of authors like Peter Mayle and Bill Bryson. So accepted a free review copy of this book, hoping to be re-energized in my ongoing quest for financial freedom.

We meet the Berglunds, a very hardworking and reasonably successful couple living in the US. He was a lawyer, a lobbyist, and a trade association executive. His wife ran a small bed and breakfast. During their vacation travels, they fell in love with the small Caribbean island of St. Martin. They drew up a 10-year plan to create a perfumery and move there, as Berglund enjoyed chemistry as a hobby. Over the next 15 years, they saved up the million dollars that was necessary to make their goal happen – create and test their fragrances, buy a property for their store, buy inventory, market to tourists, etc.

It takes a skilled writer to weave all of this into an inspiring story. Unfortunately, the reading was much more dry. Things cost more than expected. Don’t they always? I was hoping for some examples of creative frugality, but nothing especially interesting popped up. Buying property on a small island that happens to be a overseas collectivity of France? Slow. Plus you’re a US citizen? Even slower. House repair? Takes a while. Phone repair? I get it. Island life is slow. Now, perhaps this is a good lesson for someone actually thinking about moving to the island, but I was left wanting for a charismatic character, a humorous story, or that “oooo-I-wish-I-could-do-that-too” feeling.

I also couldn’t help but be slightly annoyed when they talked about “living like a local”, but kept throwing out excuses about how they live in the French (and French-speaking) side of St. Martin but refused to learn French. That doesn’t sound like living like a local to me. If this is your new home, why not learn the language?

The Berglunds sound like nice, energetic people and I’m very happy they achieved their personal goals. They should be proud of themselves. I hope they are profitable in their new business as I believe they do need it to succeed. (They were not financially independent first.) I’m afraid I just didn’t find any inspiration in the book. The takeaway lesson seemed to be that if you really want it bad enough and save up a million dollars first over 10-15 years, you too can own a small business on a Caribbean island.

Market Timing Is Hard: Actual Investor Returns Lag Fund Returns

When you look up the historical performance of mutual funds, you are typically getting what is called a time-weighted return. For example, the 5-year return is what you would have gotten if you bought the fund five years ago and held it continuously until today, all the while reinvesting dividends, with no additional purchases or withdrawals.

But real life is different. People add money in, people take money out. Morningstar calculates an additional metric called Investor Return [pdf], also known as a dollar-weighted return. This measures the returns that investors actually achieved in that fund, based on dollar inflows and outflows. This means that if investors as a whole timed their purchases correctly and bought more shares when the fund was low, then their returns would actually be higher than the time-weighted returns. If instead, investors waited until the fund performed well before buying in, and/or sold their shares only after the price was temporarily lagging, then their dollar-weighted returns would be lower than the time-weighted return.

Russell Kinnell of Morningstar has a revealing article and chart comparing the performance of the average fund with the average investor, broken down by category like US stocks or municipal bonds. This higher-level view is useful because it takes out any noise you might get from just looking at a specific mutual fund. Did the average investor’s market timing efforts pay off? Here are the results, broken down into the past 3, 5, and 10-year periods.


Source: Morningstar

We see that across almost every category and every timeframe, the investor return lags the fund return. That gap also tends to grow over time, with an average underperformance of nearly 1% a year over the last 10 years. That’s a lot of money. The S&P 500 is basically back to it’s all-time high back in 2007, even though it was a crazy roller coaster in between, and it seems most people didn’t time it correctly. It would be wise to remember this consistent underperformance this the next time you think about market timing, or buying something simply because it did well in the recent past.

Motif Investing Adds New Passive, Index Fund Portfolios

Motif Investing is a new brokerage firm that is unique in that it lets you buy an entire basket of up to 30 stocks for only $9.95 per trade. I previously thought that this would be useful to creating your own “custom ETF” of whatever you want, for example dividend stocks.

This week, they rolled out a new set of “motif” baskets which are focused on passive, index fund strategies. I’m happy to see this, although in my opinion some are hits and others are misses. You can find them under the “Investing Classics” category:

  • Permanent Portfolio. Based on the Harry Browne Permanent Portfolio of 25% stocks, 25% long-term bonds, 25% cash (short-term bonds), and 25% gold. Their implementation seems a bit needlessly complex, however, as they use over 15 ETFs to replicate international stocks when they could have just used something like Vanguard Total International ETF (VXUS). But again, you can edit and customize the motifs to simplify down to 4-6 ETFs. Still, buying 5 ETFs of your choice in one go for $9.95 isn’t bad, and they will even rebalance for you as well.*
  • Target Date Motifs. Based on target-date retirement funds, you can choose for example “Retiring 2050” or “Retiring 2030”. I’m not a big fan of this one, if you want to go this route I’d just stick with the Vanguard Target funds bought directly from Vanguard for no commission fees at all and the highest level of simplicity.
  • Ivy League. Based on the Yale Endowment manager David Swensen portfolio. Nice and simple, just the 6 ETFs matching each of the asset classes as described in his book Unconventional Success. I’m biased of course, as my own portfolio is very similar to this.
  • Index Fans. Supposedly based on the Boglehead philosophies of Jack Bogle, founder of Vanguard. I don’t know why they chose to use a combination of the Total World Stock ETF (VT) and Total US (VTI), when VT is already 50% US stocks and hold a lot less companies (and thus less diversification) as compared to holding US and non-US separately with VTI and VXUS. Or why they didn’t just use a single Total Bond ETF (BND) for bonds. I’m thinking they didn’t actually get official Bogle approval, nor did they read the Bogleheads book.

*Excerpted from a previous interview with Tariq Hilaly, Motif Investing’s Co-Founder & Chief Investment Officer:

MMB: Does the motif ever “rebalance” in the future back to the original weightings to prevent drift?
A: Yes, we rebalance most motifs on a quarterly basis. On rare occasions, with longer-term investing strategies that take longer to play out, we rebalance once a year.

$150 Sign-up Bonus.

Motif Investing is also offering a $150 cash bonus when you open a new brokerage account with $2,000+ and make 5 trades at $9.95 each. If you make 1 trade, you’ll get $50. 3 trades will get $75. The new funds must be posted to the account within 10 calendar days of account opening, and must remain in the account for 45 calendar days.