Tag: discount broker

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Zero and negative expense ratio ETFs have arrived.

In the past few months, firms have begun to offer zero expense ratio and negative expense ratio ETFs. In an article recently published by the Financial Adviser, two
zero expense ratio ETFs were mentioned. The first were the Sofi Select 500 ETF (ticker: SFY) and the SoFi Net 500 (ticker: SFYX) . Both have temporarily waived fees until at least June 30, 2020.

Then, Salt Financial filed for an ETF with the Security and Exchange commission, named the Salt Low TruBeta US Market ETF, with a -0.05% expense ratio. That’s right…this fund will pay investors $5/year for every $10,000 invested. Similar to the Sofi ETFs, this offer is good until April 30, 2020, or when the fund reaches $100M in assets under management.

So, do these expenses justify selecting them over other ETFs with similar objectives, but charge a higher rate? A recent survey by Brown Brothers Harriman indicated that for U.S.-based advisers and fund managers, expense ratio was the most important criteria. But, there are other factors worth considering.

Other costs matter beyond expense ratios

As my previous journal article “Is There a Free Lunch in Commission Free ETFs?“, I cited three expenses relevant to ETF investments.

  1. Expense ratios
  2. Trading commissions
  3. Bid-ask spreads

The SoFi Select 500 ETF is easy to compare to other ETFs that track the S&P 500 Index. The table below shows its expenses versus ETFs with similar objectives, and offered commission-free from one of the five discount brokers analyzed by ETFMathGuy.

Individual and Total Expenses for S&P 500 ETFs, assuming $10,000 investment over 1-year.
Individual and Total Expenses for S&P 500 ETFs, assuming $10,000 investment over 1-year.

As this table shows, a prudent investor would recognize that the SoFi ETF average bid-ask spread makes it an inefficient way to invest in the S&P 500.

What about the other ETFs with zero and negative expense ratios?

Evaluating the other securities is more difficult, due to their limited return history. After a longer history is available, the returns of these funds could be compared to other ETFs. Then, we could form a table like the one above with ETFs that have a nearly perfect correlation to these funds. Assuming these firms avoid closing these funds, we plan to look at this topic in the future.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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May 2019 Optimal Portfolios are Now Available to ETFMathGuy subscribers

The 2019 optimal portfolios for the month of May are now available to subscribers of ETFMathGuy. Just log in and select your discount broker.

You can now view the current optimal portfolios for the five discount brokers analyzed by ETFMathGuy. These portfolios cover nearly 1,500 ETFs currently offered commission-free from Ameritrade, ETrade, Fidelity, Schwab and Vanguard.

Portfolios now include updated ETF lineups from Ameritrade, ETrade and Vanguard

As we mentioned in our last post, Ameritrade, ETrade and Vanguard expanded their commission-free lineup. So, the portfolios for the month of May now consider these new funds. Here is a simple count of the number of commission-free ETFs now available from our five discount brokers. Note that IRA accounts exclude the 46 municipal bond ETFs discussed in our recent article.

Commission-free ETFs for Taxable and IRA accounts, as of April 30, 2019

However, this lineup change does not significantly alter the ETFMathGuy portfolios. Remember that several years of price history are necessary to build optimal portfolios. So, ETFs that haven’t been around very long will not be considered as part of the later stages of the portfolio construction process.

Unsure of which discount broker to pick?

If you haven’t yet settled on a discount broker that offers commission-free ETFs, consider the following. Last month, we showed the updated expense ratios and bid-ask spread for Fidelity and Schwab’s commission-free ETFs. Below is the updated information for our other three brokers, Ameritrade, ETrade and Vanguard.

Expense ratios, as of April 2019, for commission-free ETFs offered by Ameritrade, ETrade and Vanguard.
Expense ratios, as of April 2019, for commission-free ETFs offered by Ameritrade, ETrade and Vanguard.

It is pretty clear that, when it comes to expense ratios, Vanguard is the clear winner. The same can be said for Vanguard’s advantage with generally lower bid-ask spreads.

Bid-ask spreads, as of April 2019, for commission-free ETFs offered by Ameritrade, ETrade and Vanguard.

Bid-ask spreads, as of April 2019, for commission-free ETFs offered by Ameritrade, ETrade and Vanguard.

So, is Vanguard the best broker for commission-free ETF portfolios?

This is an excellent question. In terms of number of commission-free ETFs, Schwab is the leader. But, on the basis of cost, Vanguard is the clear winner. What about diversification? Perhaps the diversification benefit of the Schwab (or some of the other discount brokers) can offset their higher costs? We will explore this topic in a future blog post. Stay tuned!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Discount brokers adjust and expand their commission-free ETF lineup

A few weeks ago, we discussed the expanded commission-free ETF lineup offered by Fidelity and Schwab.

In this post, we revisit the current commission-free ETF lineup offered by the three other discount brokers analyzed by ETFMathGuy. These three brokers include Ameritrade, ETrade and Vanguard.

Ameritrade’s updated lineup of commission-free ETFs

Ameritrade continues to offer 308 commission-free ETFs. Our list used to develop optimal portfolios at ETFMathGuy at the end of last year did change somewhat. Seven ETFs ceased trading in February and March, and most were from WisdomTree.

Seven ETFs ceased trading in February and March, 2019, and were removed from Ameritrade's commission-free ETF lineup.
Seven ETFs ceased trading in February and March, 2019, and were removed from Ameritrade’s commission-free ETF lineup.

Ameritrade replaced these ETFs with seven commission-free ETFs. These replacements come from First Trust, State Street, iShares and Invesco.

Ameritrade added seven funds to their commission-free ETF lineup.
Ameritrade added seven funds to their commission-free ETF lineup.

ETrade’s updated lineup of commission-free ETFs

ETrade made a modest increase to their commission-free ETF lineup, increasing from 259 to 274. Their lineup change was due to removing a number of funds from Vanguard. In addition, and like Ameritrade, many of these ETFs from JPMorgan, Legg Mason and WisdomTree ceased trading.

Fourteen ETFs removed from ETrade's commission-free ETF lineup.
Fourteen ETFs removed from ETrade’s commission-free ETF lineup.

The additional commission-free ETFs offered by ETrade come from a variety of ETF providers, such as Invesco, WisdomTree, iShares and others. The real question here is will these new funds be around for the long haul.

Etrade's commissoin-free ETF lineup includes 29 additional funds.
Etrade’s commissoin-free ETF lineup includes 29 additional funds.

Vanguard’s updated lineup of commission-free ETFs

Vanguard made the smallest change to their list of commission-free ETFs, adding only two funds. Consequently, Vanguard’s total lineup increased from 57 to 59, and embraces a new trend in Environmental, Social and Governance (ESG) investing.

Vanguard expands their commission-free ETF lineup.
Vanguard expands their commission-free ETF lineup.

So what does this mean for an individual investor?

So what this means to an individual investor? A larger number of commission-free ETFs should provide a greater opportunity for diversification and possibly higher returns. Evidence for this appears in the expected returns and volatility estimates in the latest portfolios developed by us at ETFMathGuy. However, what if you are an investor who had invested in one of the ETFs that ceased trading? An article claims that the liquidation process is mostly painless for the investor. It also claims that even if you don’t sell the ETF before it ceases trading, “you are still going to get fair value for the fund based on the final liquidation”. The bigger issue is how removal of the ETF affects your asset allocation and underlying strategy. If you are following the current portfolios at ETFMathGuy, we have already updated our databases to accommodate such a change.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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April 2019 Optimal Portfolios are Now Available to ETFMathGuy subscribers

The 2019 optimal portfolios for the month of April are now available to subscribers of ETFMathGuy. Just log in and select your discount broker.

You can now view the current portfolios for the five discount brokers analyzed by ETFMathGuy. These portfolios cover over nearly 1,500 ETFs currently offered commission-free from Ameritrade, ETrade, Fidelity, Schwab and Vanguard.

What’s new? Full ETF names, portfolio & benchmark statistics, and portfolios for taxable and IRA accounts.

So, what’s new this month? First, we’ve added the full name of the ETF, so that subscribers don’t need to look up individual ticker symbols. For instance, the portfolios continue to favor the utility sector. So, for example, the Vanguard portfolio lists both the ticker “VPU” and its full name, “Vanguard Utilities ETF”, in the portfolio tables.

New information available on 2019 optimal portfolios from ETFMathGuy
New information available on 2019 optimal portfolios from ETFMathGuy

Second, we’ve added portfolio annualized statistics for expected return and volatility. Now, it is clear what the risk levels are set to in portfolio construction, regardless of the discount broker. For the month of April, annualized risk levels were

  • Conservative: 5.7%
  • Moderate: 8.3%
  • Aggressive: 11.0%

Third, we’ve added benchmark statistics. These measures are an excellent way to understand how the optimal portfolios match up to the broad stock, bond and cash benchmarks used by ETFMathGuy.

Last, but not least, we’ve run our portfolio construction process to include and exclude municipal bond ETFs. As mentioned in our recent post, brokers like Fidelity often restrict the use of municipal bond ETFs in IRA accounts. The summary table at the top of the current portfolios now indicate either Taxable or IRA (no munis).

We hope you find these 2019 optimal portfolios insightful and educational! If you enjoyed reading this post, we hope you will share it with others in your personal or professional network. Just click one of the icons below. And, for a limited time, subscriptions are free!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

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Commission-free Municipal Bond ETFs and a diversified portfolio

Commission-free ETFs cover a number of important asset classes, including municipal bonds. “Muni” ETFs can add an important asset class to a diversified portfolio, as returns often differ from other bond ETFs. “Muni” bond ETFs also carry the important benefit of tax-exempt interest.

“…munis are well-known for delivering tax-exempt interest”

Cinthia Murphy, ETF.com, March 18, 2019

Not surprisingly, discount brokers like Fidelity don’t permit their use in tax-advantaged retirement accounts, like IRAs. Since there are currently 46 municipal bond ETFs, most retirement accounts really don’t have access to the full list of commission-free ETFs advertised by discount brokers. The chart below summarizes the number of commission-free ETFs available. It includes the five discount brokers analyzed regularly by ETFMathGuy to develop optimal portfolios.

This chart shows that no single broker offers all 46 “muni” ETFs commission-free. But, Schwab and Fidelity offer the most at 12, followed by ETrade (11), Ameritrade (10) and Vanguard (1).

So, what does this mean for a diversified portfolio with commission-free ETFs? ETFMathGuy will be expanding portfolio construction to include both IRA accounts (that don’t include municipal bond ETFs) and taxable accounts that do.

Please be sure to check back at the beginning of April to see how municipal bond ETFs affect the diversified portfolios created by ETFMathGuy.


ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Discount brokers expand their lineup of commission-free ETFs

Last month, Fidelity and Schwab announced an expansion of the commission-free ETFs offered to their customers. We touched on this point in a recent ETFMathGuy Blog post. But, we didn’t get into much of the details of what an expanded lineup of commission-free ETFs would mean for an investor. So, in this post, we will dig into some of cost details, like expense ratios and bid-ask spreads.

Fidelity’s expanded list of commission-free ETFs for 2019

The announcement on February 12, 2019 indicated over 500 commission-free ETFs. As a current Fidelity customer, I was delighted to see the expansion. Unfortunately, as of March 16, 2019, Fidelity’s ETF screener revealed only 357 ETFs as commission-free. Note that this screen is only available to current Fidelity customers.

Fidelity's commission-free ETF list, as of March 16, 2019 reveals 357 funds available.
Fidelity’s commission-free ETF list, as of March 16, 2019.

Given the strong reputation Fidelity has in the investment community, I am sure they will follow through soon with their fully expanded lineup of more than 500 commission-free ETFs. However, it is unfortunate that Fidelity’s press release didn’t give a specific timeline for when the fund expansion will occur in its entirety, except to say “…in the coming months”.

Schwab’s expanded list of commission-free ETFs for 2019

Schwab now claims 500+ commission free ETFs. We downloaded the list of Scwhab’s expanded commission-free ETFs, and found exactly 500. So, we are not sure where the “+” comes from, but this is still quite a large lineup.

How do the expense ratios compare?

Expense ratios are important, as they are a continuous drag on returns. So, ETFs with lower expense ratios than others tracking the same index should produce higher returns. Using data obtained from ETF.com, we created charts to show a histogram of expense ratios for the commission-free ETFs from Fidelity and Schwab.

Expense ratios for Fidelity's commission-free ETFs are generally lower than those from Schwab
Expense ratios for Fidelity’s commission-free ETFs are generally lower than those from Schwab.


What does this data show us? Generally, expense ratios are lower for Fidelity’s commission-free ETFs. But, there are quite a few (about 20% or 1 out of 5) of Fidelity’s commission-free ETFs with an expense ratio between 0.4% and 0.5%. So, with a little careful selection, Fidelity offers a larger fraction of commission-free ETFs at lower expense ratios then Schwab.

How do the Bid-Ask spreads compare?

Bid-ask spreads are the costs incurred when an ETF is bought or sold, and which I discuss at length in my article “Is there a free lunch in commission-free ETFs?“. Once again, using data from ETF.com, we see that nearly 80% of the commission-free ETFs from Fidelity have spreads below 0.2%. This compares to about 74% of funds from Schwab that have spreads below 0.2%. Thus, Fidelity’s commission-free ETFs have generally lower spreads then those offered by Schwab. So, for more active investors, Fidelity’s commission-free ETFs appear to have the advantage of lower transaction costs.

Bid-ask spreads from Fidelity's commission-free ETFs are generally lower than those from Schwab.
Bid-ask spreads from Fidelity’s commission-free ETFs are generally lower than those from Schwab.

Conclusions

Competition for investor assets continues, to the benefit of investors using commission-free ETFs. In this post, we discussed some of the details of the updated lineup of commission-free ETFs now offered by Fidelity and Schwab. We find that while Schwab still offers more ETFs commission-free, Fidelity’s costs are generally lower. Lower expenses are important, as they can often lead to higher returns for funds tracking similar indices.

Thanks for reading!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

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ETFs to Mitigate Volatility and Enhance Diversification

Last week’s Wall Street Journal noted that Charles Schwab Corp. and Fidelity Investments have doubled the number of commission-free ETFs they offer.

This is good news for individual investors! More investment options can help enhance diversification and consequently, mitigate volatility.

Here at ETFMathGuy, we build portfolios to do just that…minimize volatility using our proprietary software. In fact, our approach addresses the exact point made by Ben Johnson’s quote, director of fund research at Morningstar. In the article, he states:

“As people stop obsessing over fees, they’re coming to realize that what matters most is portfolio construction. “

Quote from Ben Johnson, Director of Fund Research at Morningstar

We hope you enjoy reading this WSJ article!

For notifications of the latest commentary of ETF investing, please join us with a free membership.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.


ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.