Everybody loves FREE and transaction costs do matter. Beyond the headlines, can we as investors, make this “special offer” work for us? Four reputable firms have offered ETFs on a commission free basis. We decided to dig beyond the press releases to see which offer worked best with our Investment System.

Our conclusion? More is better. TD Ameritrade’s slate of 101 Commission Free ETFs offers the most promising lineup for our “System.” TD Ameritrade offered a good mix of ETFs from several different sponsors whose ETFs we already buy elsewhere for $8 a trade.

How did we conduct our testing? We built portfolios at Fidelity, Schwab, Vanguard and TD Ameritrade that met our criteria and only used the free ETFs advertized on the websites. In the case of Fidelity and Schwab, we used the whole list. In the case of Vanguard and TD Ameritrade, we picked our favorites.

Fidelity

Fidelity was early in the game, striking a deal with iShares help the latter build some buzz for some of its more generic ETFs. It now offers 25 ETFs on a commission free basis (list here). But, the equity side of its commission free offerings reminded us of the bargain bin. And, when we crunched the numbers, the performance of the assets in our System framework did not change our mind about the “wilted lettuce” on offer. We’ll keep paying $7.95 a pop for the ETFs we want.

Schwab

There was a lot of excitement when Schwab announced it was getting into the ETF business as a part of broader efforts to expand from broker to asset gatherer/money manager. To help promote the concept, Schwab has made all of its in-house ETFs commission free (they already boast very low expense ratios). The problem is that there are only 11 of them (list here) and like Fidelity’s free offerings, the equity funds offer such broad, bland exposure (2000 stocks in some) that it was hard for any of these vehicles to offer standout performance under recent market conditions. For our system we would prefer to have at least 15 funds to work with and to have those assets segmented in a more appropriate fashion. 11 ETFs are just not enough. When we ran our system with these assets, the results were uninspiring. That said, the promotion on the web site suggests that Schwab is offering 250 free trades for new accounts if you buy one of the in-house ETFs. That might be worth looking into.

Vanguard

Having tried out Fidelity’s and Schwab’s free offers, we were keen to see how Vanguard would stack up. Initially, the signs looked good. Vanguard has a broad range of ETFs (48 on this page) and we have had some pretty good success with systems that build on Vanguard’s mutual funds. We picked the following 18 as our portfolio (VCLT, EDV, VGSH, VWO, VGK, VPL, VNQI, VIG, VYM, VFH, VDE, VCR, VAW, VHT, VPU, VIS, VDC, VOX). The results were getting a bit better but still not what we had in mind. When we looked closely at our ETFs, we noticed that their performances were very “index like”. That shouldn’t surprise coming from the company that popularized index investing for individuals. It should be noted, however, that some of the ETFs we looked at were only just a year old (which is not enough price information) so we expect to see improvements the next time we run this test.

TD Ameritrade

By this point, we were wondering whether the whole free ETF wasn’t just a promotion to move the less exciting ETFs off the shelves. Then we went on to the TD Ameritrade site. The 101 ETFs sounded promising (commission free ETF list here) but there are plenty of me-too ETFs in the world. When going through the list, however, we found a pretty good representation of some of our favorite ETFs from a healthy slice of the reputable ETF sponsors out there.

We created a very broad 22 ETF universe which holds 2 ETFs at all times. The long term results were just what we were looking for in a System portfolio. If you are not a Silver or Gold member, the ETFs we chose were (FXI, VWO, TLT, EWA, JNK, DBC, ILF, SHY, VGK, LQD, AAXJ, PCY, DJP, EWX, DBO, RWX, VYM, IWC, GUR, EWC, RSX, EWZ). You can check out their current ratings on the “Steam Gauge.”

So, the clear winner in our little contest is TD Ameritrade. From its slate of commission free ETFs, we could easily find the asset classes we wanted to include in our investment universe. These were ETFs we were paying sub $10 commissions to buy at other places so we did not feel like the list forced us to compromise investment performance to save a few bucks.

Seeking Alpha Portfolio

Week One of the Seeking Alpha Portfolio

On Monday, as threatened in previous posts, I bought enough shares (I already had some) to get my ETF portfolio to 500 shares of EWH (@ 19.63), 370 shares of EPI (@ 26.76) and 130 shares of TUR (@74.87). I paid $7.95 a trade so at Monday closing prices shown in brackets, I was left with my three positions and $526.85 in cash. At the end of a dreary trading week, my portfolio is worth $29,365.55 for a 2.11% loss.

As you can see from the table, the top three remain the same so for this coming Monday. There will be no trades.

In the post this week, I talked about how using an “Investment System” removes a lot of the emotion surrounding investments so that one can get on with the job of managing one’s money. This is a forward test, so it is too early to say whether my “System” will deliver the goods after only one week.

I personally think removing emotion from the investment decision and management process is a good thing. Although it is fun to get swept up in the excitement of the financial markets, I have seen no evidence that emotional, regret seeking habits add to one’s investment performance. I have seen plenty of evidence that relying on your “gut feel” in these markets can do severe physical and emotional damage. So, for me, I prefer to save my emotional energy for other pursuits.

Balance the Budget (if you have a few spare minutes)

The New York Times put out a great interactive feature which lays out many of the budget issues confronting the Federal Government in checklist format. I was able to solve the 2030 budget although I left a bit of a gap still in 2015 with a 85/15 split between cost cuts and tax rises. There is no submit button but exercises like these should eventually help quantify the issues for voters. Hopefully, that will eventually translate into effective policy.


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