Frisco Financial Planning LLC

Investment portfolio design with a Christian worldview

Why free ETF trades may not be such a great deal

Schwab, Fidelity, and Vanguard have all recently rolled out free ETF trades of one variety or another.

Schwab & Vanguard let their account holders buy and sell their respective ETFs free of charge while Fidelity offers a number of ishares at zero transaction cost to their customers.

Is this a good deal?  Well, free is certainly a good price.  However, you can trade ETFs at many other firms for as low as $4 and typically not higher than $10.  So unless you are using ETFs to dollar cost average into funds frequently in small transaction amounts, the difference might not be that material.

More importantly, there are many reasons to consider or reject a particular ETF that rank much higher on the list than free trades.  Such reasons include the index the particular fund tracks, the liquidity of the fund itself as well as the underlying securities it holds, the typical bid/ask spread of the fund, and the fund's propensity to trade near or away from its net asset value, among others.

Lastly, there is much to be said about the brokerage firm trading platform you use.  Fidelity, Schwab, and Vanguard (and almost all other brokerage firms) still use a cumbersome, "old school" share-based, individual security trading system which requires great effort and is prone to human error when executing an investment strategy.

My advice is not to choose your ETFs based on zero transaction fees, but instead select your funds based on the more important criteria mentioned above.

And do yourself a favor and check out Folio Investing.  Under their basic pricing plan, most investors pay between $50 and $150 a year to effect a sound, long-term buy and hold investment strategy. A small price given their superior investing platform.

Note:  I receive no compensation from and am in no way affiliated with Folio Investing.  I'm just a big fan of their technology platform and brokerage services.

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How Folio Investing helps you trade ETFs safely

The unprecedented "flash crash" in the market two weeks ago highlighted the delicate nature of trading securities in today's financial markets dominated by program and "high frequency" trading.
 
I've written before about why I love Folio Investing's unique online trading platform.  Here are several features of their technology that can help protect you from trading mishaps:
 
1)  No margin.  Folio will not execute a trade if you don't have money in your account to cover it.  This is a vast departure from many firms that let you "buy now and pay later."  This serves as a safety mechanism against your inadvertently placing a trade in error.
 
2)  Trades are based on models and percentages, not dollars and shares.  Converting from percentages to dollars and dollars to shares and then manually entering each trade is highly prone to human error.  Folio's system is much more efficient resulting in less potential for human error.
 
3)  Window trades are converted from dollars to shares at the time the trades are executed, not when the trades are placed.  This means you can place the trades after market hours without having to worry about after-hour market price movement (this does not, however, protect you from possible market movement or volatility if your trade is sent as an unqualified market order as many of Folio's window trades are-- see #6 below for an additional protective measure).
 
4)  Window trades are "crossed," when possible, among multiple Folio clients.  In these cases, you get a better trade execution without the order being sent to an exchange.
 
5)  Window trades are "batched," when possible, across multiple Folio clients.  Large trades are then sent to market makers on a "not held" basis in an attempt to gain execution at the average price for that window period.  This works to protect you against trades that might "move the market."
 
6)  Folio's platform allows you to set a "cancel limit threshhold."  When set, this feature will automatically cancel any window trade if the aggregate order "moves against you" by a certain percentage between the time you place the order and the time the next window closes.  This essentially serves as a personal "circuit breaker" to keep you away from highly volatile trading conditions.
 
Whether you use Folio or another brokerage firm, there are risks inherent in trading ETFs.  If you do not understand or are not comfortable with the risks that ETFs pose, you should consider investing in traditional mutual funds instead.
 

 

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Performance reporting: another reason to love Folio Investing

Investment performance is something that is over-emphasized by many investment advisers, both by how much time they spend talking about it with clients as well as how much time, effort, energy, and money is spent producing performance reports (performance reporting software can cost into the five figures on an annual basis and many firms employ full-time staff to download and reconcile transactions and report performance).

It is necessary, though, to have a quick and accurate way to measure how your investment accounts have performed over historical periods, and to have a reasonable basis of comparison to know how you are doing.

Another reason to love Folio Investing.

Folio provides its accountholders an easy way to track performance.  It is based on an accurate, time-weighted, measure of performance which is very important.  Many brokerage firms, investment advisers, and personal finance software programs use a dollar-weighted measure.

The difference between the two methods is that a dollar-weighted measure includes the effects of cash flows in and out of the portfolio.  If, for example, you make a large deposit into your account right before the market enjoys a steep run-up, your performance, under a dollar-weighted measure, will be high relative to a time-weighted measure of return.

The time-weighted measure allows you to objectively evaluate the performance of the underlying securities while removing the effect of any inflows or outflows.  It's a more difficult calculation but Folio's system does the heavy lifting for you.

You can also easily change the start and end dates and compare your account's performance to one of many benchmark indices, mutual funds, or individual securities.

The performance shown above is hypothetical and does not represent a real investment portfolio.
John Gay and Frisco Financial Planning LLC receive no compensation or "soft dollars" from Folio Investing or any other brokerage firm.

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Dumb brokerage firm technology must have been designed by a man

My wife has an expression to describe things that are designed poorly.
She says "it must have been designed my a man."

Take this refrigerator for example:

Freezer on the bottom?  Dumb.  Two handed water dispenser on the inside?  Dumber.

   
Click here to download:
Dumb_brokerage_firm_technology.zip (183 KB)
 

Most brokerage firm technology platforms are just as bad.  They are a throwback to the days when you (meaning someone... I'm not exactly sure who) would walk into your broker's office and say "Hey, Jim-Bob... Buy me 200 shares of Acme Rocket Boot Company!"


Normal people don't do that.  Intelligent investment plans are based on percentages.  "40% to XYZ fund" for example.  Dumb brokerage firms make you convert percentages to dollars, dollars to shares (in the case of stocks or ETFs), and then enter each trade separately.

Even if you are only investing in a handful of funds, and only making occasional changes, this technology wastes time and creates multiple opportunities for you (or your investment adviser) to make potentially costly mistakes.

Here's a much better alternative: 

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