Archives for July 2014

Low-cost index ETF portfolio are everywhere these days! Covestor is a site that usually charges you a fee to manage your portfolio to follow various active managers, with fees ranging up to 2% per year (split Covestor/manager 50/50). However, they recently introduced their Covestor Core Portfolios, which consist of passive ETFs from providers such as Vanguard and Blackrock iShares. These have no management fees, so you’ll just pay the expense ratios of the underlying ETFs plus any trading commissions. Total trading commissions are estimated at $20 annually (investments held at Interactive Brokers, average trade runs about $1, no markup charged). There is a $25,000 minimum investment required.

The three initial portfolios are the Covestor Core Moderate (40% stocks, 60% bonds), Core Balanced (60% stocks, 40% bonds) and Core Growth (80% stocks, 20% bonds). Periodic rebalancing will be done to maintain risk-return profile. Unfortunately, you can’t see the exact portfolio asset allocations without having an account (why not??), but you can try and tease most of the info out of what they give you. Let’s take the top 5 holdings of Core Growth:

• 34.7% Total US Stock (VTI)
• 21.4% Emerging Markets Stock (VWO)
• 19.2% Developed International Stock (VEA)
• 7.2% Total US Bond (AGG)
• 5.1% US REIT (VNQ)

The top 4 stock ETFs add up to 80.4%, which must be all the stock ETFs that they use. Broken down in terms of stock asset allocation only, that is 43% Total US, 27% Emerging Markets, 24% Developed International, and 6% REITs.

Let’s take the Top 5 holdings of Core Moderate:

• 31.8% Total US Bond (AGG)
• 29.7% Total US Stock (VTI)
• 10.1% Treasury Inflation-Protected Securities TIPS (TIP)
• 9.2% Commodities (DJP)
• 5.6% Emerging Markets Stock (VWO)

Total US Bonds and TIPS only add up to 41.9%, but there are supposed to be 60% bonds, so I’m a bit confused. My guess is that their commodities futures ETN (DJP) is considered fixed income? Usually commodities futures are considered equity-like or an alternate asset class. I suppose they are collateralized by T-Bills, but still even added in, that’s only 51.1%. Still confused.

What about competitors? At a $25,000 portfolio balance, Betterment would charge $62.50 a year and Wealthfront would charge $37.50 a year (first $10k free). At a $250k portfolio balance, Betterment would charge $375 a year and Wealthfront would charge $600 a year (first $10k free). Vanguard Personal Advisor Services has a $100,000 minimum, but includes regular interaction with a CFP and costs 0.3% a year (a $250k portfolio would cost $750 a year). All include any trading commissions in their fees.

All in all, the lack of transparency and also lack of the asset allocations making sense don’t have me very interested in Covestor Core Portfolios, but it is definitely part of an accelerating movement towards having low-cost index funds as your primary investment holding. Remember, with a little learning you can easily DIY all this for “free” as well and maintain full control over your investments.

More: Barron’s (their asset allocation percentages are wrong, they assume the Top 5 holdings are the entire portfolio), ETF.com

Another online ETF portfolio advisor joins the mix. Discount brokerage TradeKing, possibly best known for their $4.95 stock trades, announced a new subsidiary called TradeKing Advisors which will directly manage ETF portfolios for retail customers. Details:

• Portfolio asset allocation designed and monitored by Ibbotson Associates. There will be Core and Momentum portfolios.
• The portfolio will be determined by an 8 question risk questionnaire.
• TradeKing Advisors will manage and rebalance portfolio as needed to stay on target. Assets will be held at TradeKing brokerage.
• Management fee of 0.75% of account balance annually for Core portfolios, minimum initial investment of $10,000. For Momentum portfolios, 1% management fee and $25k minimum account size. For account balances over $250,000, the fees for each portfolio are reduced to 0.50% annually.

Per their website, their “strategies include a diversified allocation of up to 20 asset classes – including fixed income, equities, real estate and foreign investments – implemented cost-effectively with ETFs.” I could not find any specific information about the asset allocation of these ETF portfolios or the ticker symbols used.

But that’s okay, as I pretty much stopped listening when the fees were listed at 0.75% for a basic index ETF portfolio. It may be less than what E*Trade charges but in my opinion that’s still too much to pay for any ETF portfolio, and much more than many other services like Betterment and Wealthfront that do pretty much the same thing also with a slick user interface. Supposedly TradeKing will differentiate themselves with their “exceptional customer service”. As a TradeKing brokerage customer, I found their customer service fine and Live Chat is nice but not worth another 0.40% to 0.50% annually as you don’t even get assigned a Certified Financial Planner or CFA. So far it just sounds like an expensive robo-advisor. In that case, I will pass.