Archives for March 2011

Update: As of late 2012 Scottrade announced that they would liquidate their FocusShares ETFs.

Scottrade bought FocusShares as a subsidiary and has joined the free ETF landscape. They introduced 15 new low-cost Focus Morningstar ETFs which passively track several major broad indices. Discount brokerage Scottrade will allow account holders to trade them commission-free without any holding limits or additional requirements. You don’t need a certain balance, and you could trade as little as one share at a time. Here’s a list of the ETFs:

Focus Morningstar US Market Index ETF (FMU)
Focus Morningstar Large Cap Index ETF (FLG)
Focus Morningstar Mid Cap Index ETF (FMM)
Focus Morningstar Small Cap Index ETF (FOS)
Focus Morningstar Basic Materials Index ETF (FBM)
Focus Morningstar Communication Services Index ETF (FCQ)
Focus Morningstar Consumer Cyclical Index ETF (FCL)
Focus Morningstar Consumer Defensive Index ETF (FCD)
Focus Morningstar Energy Index ETF (FEG)
Focus Morningstar Financial Services Index ETF (FFL)
Focus Morningstar Healthcare Index ETF (FHC)
Focus Morningstar Industrials Index ETF (FIL)
Focus Morningstar Real Estate Index ETF (FRL)
Focus Morningstar Technology Index ETF (FTQ)
Focus Morningstar Utilities Index ETF (FUI)

Tracking Indexes
It’s a bit annoying that all these guys track a proprietary index from Morningstar. For example, the US Market Index ETF tracks the Morningstar® US Market Index, the Large Cap Index ETF tracks the Morningstar® Large Cap Index, and so on. I know they probably end up very close to other broad indexes, but it makes performance comparisons more difficult. Perhaps they really wanted the Morningstar brand on them, or maybe the licensing fees are a lot cheaper than MSCI or S&P charges? Maybe both.

Expense Ratios
One of the major attractions of these new ETFs are their super-low expense ratios. In most cases, they are the cheapest in their sector, even lower than Vanguard. The US Market Index ETF charges a mere 0.05% annually. They provide a ETF expense comparison chart.

However, Vanguard’s structure has them offering ETFs “at cost”, which means that employees are getting paid, but there are no profits going off to eagerly waiting shareholders. Vanguard’s US Market Index ETF (VTI) is huge with nearly $20 billion in assets, and they are charging 0.07%. There is absolutely no way Scottrade & Focus are making money on these things at 0.06%, somebody is subsidizing the heck out of them and will be losing money for a while. If these don’t do very well, then they will either shut them down or raise expense ratios in the future.

Would I Buy Them?
First, competition is good, and I’m happy that people are realizing that costs do matter. If you really wanted exposure to these areas and already have a Scottrade account, this does makes them very convenient. You can open an account with just $500, and there are no minimums or maintenance fees. I can see how Scottrade-affiliated financial advisors would like them, as it lower costs for clients already committed to the platform, and they can rebalance without commissions.

There are similar free ETF offerings from Fidelity, Schwab, and TD Ameritrade

If you are an individual investor buying ETFs as a long-term holding, my preference would be to open an account at Vanguard, buy their ETFs with no commission as well (or mutual funds), and be able to feel confident that your costs will always remain reasonable. They also have a much wider selection, including international stocks and bond funds. FocusShares already shut down all their ETFs once back in 2008 already. Are these added risks worth $2 a year for every $10,000 invested?

More coverage: IndexUniverse, WSJ.

The SEC has officially recommended that anyone that provides personalized investment advice to retail consumers should be subject to a fiduciary standard of conduct. Put simply, this means that anyone under the “financial adviser/money manager” umbrella has to be legally required to put your interests ahead of their own. Currently, many people providing advice are simply salespeople with fancy titles. As you might expect, big Wall Street firms are pouring millions toward lobbying efforts to stop it.

Tara Siegel Bernard of the NY Times writes in her Will You Be My Fiduciary? blog post about one CFP who’s started circulating his own Fiduciary Pledge. The idea is to get your investment planner/portfolio manager to sign it. Sounds like a good test to me.

The Fiduciary Pledge

I, the undersigned, pledge to exercise my best efforts to always act in good faith and in the best interests of my client, _______, and will act as a fiduciary. I will provide written disclosure, in advance, of any conflicts of interest, which could reasonably compromise the impartiality of my advice. Moreover, in advance, I will disclose any and all fees I will receive as a result of this transaction and I will disclose any and all fees I pay to others for referring this client transaction to me. This pledge covers all services provided.

X________________________________

Date______________________________

Ron A. Rhoades writes an RIABiz article outlining how applying the SEC recommendation could alter the financial landscape for clients, leading to reduced fees for individual investors (and thus higher returns and bigger nest eggs) and more difficult justifications for creating “sh***y investments”.

Because fiduciary advisors operate under a fiduciary standard of due care, and because fees and costs of investment products do matter, closer scrutiny of the “total fees and costs” of pooled investment vehicles and other financial products would occur. As a result, portfolio turnover within funds would decline dramatically, and even greater pressure would be brought to bear on other aspects of the fees and costs of pooled investment vehicles. However, true fiduciaries would not have to choose the lowest cost product; rather, they would justify, as part of their due diligence process, why each fee and cost was worthwhile for the investor client to incur.

Not everyone wants to manage their own investments. But if you are paying someone for help, I would agree that they should be a fiduciary at a bare minimum.

I got an e-mail this morning that my trading account with OptionsXpress is merging with Charles Schwab. Well, considering Schwab (SCHW) has a market cap over 20 times that of OptionsXpress (OXPS), it’s more like they bought OX for their options/futures trading platform and active-trader clients. The WSJ reports:

OptionsXpress shareholders will get 1.02 shares of Schwab stock in exchange for each OptionsXpress share. That values OptionsXpress at $17.91 a share–a 17% premium based on Friday’s closing prices. OptionsXpress’s stock jumped 17% to $17.90 Monday, while Schwab finished up 0.5% to $17.65.

That 17% premium works out to valuation of $1.0 billion. Looks like I’m going to be Schwab customer for the first time. What about commission rates? OX’s options rates are very competitive.

Schwab doesn’t “have any plans right now to take away the OptionsXpress platform” at this time, Bettinger said. The firm said it would try to implement across the combined company the lower of the merging companies’ commission rates.

OptionsXpress still has their $100 sign-up bonus offer live, so if you want a Chuck Schwab account, this way you’ll get a bonus for joining. Here’s a link to my perhaps-soon-to-be-stale OptionsXpress review.