Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Tuesday, September 5, 2017. You can also find the re-balance calendar for 2017 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

Fidelity Commission Free ETFs Update

At MyPlanIQ, we are always monitoring commission free ETFs and index fund expenses. In this newsletter, we look at the recent development in Fidelity, one of the major brokerages. 

A reader of our recent AAII computerized investing article made a comment on our statement on Fidelity commission free ETFs. We published our response below:

A user recently told us that the statement “Fidelity offers half-baked commission-free ETF trades that are only buy commission-free, but not sell commission-free.” in the article is misleading. He believes that Fidelity offers ETFs that are commission free in both purchase and sell trades. 

Here is our answer: 

We have monitored Fidelity commission free ETFs since the days they were introduced. Fidelity went through commission free (both purchase and sell) and then commission free purchase but sell with a commission till last year sometime. Apparently, recently, they changed the policy to 

commission free purchase and sell with some activity fees (0.01 – 0.03 per $1000, so $100,000 would be charged $1-$3). 

This is true even after you have held shares for more than 30 days. So it’s still not entirely commission free but now it’s close. 

See foot print on page : 

Free commission offer applies to online purchases of Fidelity ETFs and select iShares ETFs in a Fidelity brokerage account. Fidelity accounts may require minimum balances. The sale of ETFs is subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal). iShares ETFs and Fidelity ETFs are subject to a short-term trading fee by Fidelity if held less than 30 days. 

We wrote the piece late last year and the information was correct at that time.

So Fidelity now changed back to more or less commission free ETFs even for sales of these ETFs (strictly speaking, this is still not 100 commission free for ETF sales). We are encouraged by this development, even though we dislike its change of heart in the past. 

Here are some more details on Fidelity commission free ETFs (see Fidelity web page): 

Since Fidelity offers its own ETFs, they naturally use the commission free mechanism to promote their own ETFs, even though most of their ETFs are very new and have limited liquidity (trading volume) at this moment. We don’t find most of these new and obscure ETFs appealing. For example,  even though its expense ratio 0.084% is lower than 0.12% of VNQ (Vanguard REIT ETF)FREL (Fidelity MSCI Real Estate ETF) has less than 100,000 daily volume, making it very hard to rebalance/trade.  On the other hand, a more established Fidelity Nasdaq 100 ETF ONEQ’s expense ratio 0.21% is still higher than the famous QQQ’s 0.20%. 

For Fidelity ETFs, the only one we find to be useful is FBND (Fidelity Total Bond ETF), an actively managed total return bond fund, which was covered in our previous newsletter February 27, 2017: Fidelity Total Bond Fund Review

We find Fidelity’s commission free iShares ETFs more attractive: they include some of more established and more liquid iShares ETFs for domestic stocks and bonds. The following table shows how the foreign ETFs are compared with Vanguard’s. 

Foreign equity ETF comparison (performance data as of 8/14/2017):
Ticker/Portfolio Name Expense Ratio Average Daily Volume YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
IEFA (iShares Core MSCI EAFE) 0.12%  4,534,807 15.1% 13.7% 3.3%    
VEA (Vanguard FTSE Developed Markets ETF) 0.07%  7,729,736 16.2% 14.8% 3.6% 8.5% 2.0%
EFA (iShares MSCI EAFE) 0.33% 18,547,766 14.2% 13.0% 2.4% 7.7% 1.5%
IEMG (iShares Core MSCI Emerging Markets) 0.14%  7,360,107 21.8% 15.0% 1.3%    
VWO (Vanguard FTSE Emerging Markets ETF) 0.14%  10,535,455 19.5% 13.5% 1.1% 3.3% 2.0%
EEM (iShares MSCI Emerging Markets) 0.72%  50,899,147 22.6% 15.4% 0.8% 2.9% 2.0%

The good news here is that both IEFA and IEMG in the Fidelity commission free ETFs are now catching up with Vanguard’s ETFs, both in terms of expense ratio and average volume. Notice the difference between IEFA and EFA, besides their expense ratios, is that IEFA has more exposure to small cap stocks. This makes it less liquid but on the other hand, it should deliver slightly higher returns in a long term. So for strategic asset allocation portfolios that rebalance only once a year or so, IEFA is actually better than EFA. Similarly, the difference between IEMG and EEM, in addition to their expense ratios, is that IEMG invests more in small cap stocks. 

Notice IEMG and VWO are tracking two different indexes (MSCI Emerging Markets and FTSE Emerging Markets respectively). Some interesting facts:IEMG had no exposure in Chinese A-shares exposure until recently. The other is that VWO has no South Korea’s exposure at all as FTSE index does not consider South Korea as an emerging market. 

Unfortunately, we find the lineup has a major missing piece: US REITs.  FREL (Fidelity MSCI Real Estate ETF) in the commission free list has extremely low daily trading volume (130k) and low total assets ($390 million), making it not very useful for portfolio construction at all. Fidelity users are forced to pay $4.95 commission if they want to use more established one such as Vanguard REITs VNQ. The commission free ETFs include IFGL (iShares International Dev Rel Est), an international REIT index fund. This somewhat remedies the lack of REITs representation. Nevertheless, missing US REITs representation is a major drawback in the list. 

Finally, we want to emphasize again that investors should not be lured away to the low volume, high expense or too special ETFs just because they are commission free. The price you pay for your portfolios will be much higher than the commissions you save for these ETFs. 

In a future newsletter, we will look at the funds in Schwab, another major brokerage.

Market Overview

Last week, stocks exhibited some volatility: S&P 500 index dropped 1.4% on Thursday alone, which seems to be a ‘large’ loss. However, we should be reminded that in many other periods, a daily 1% fluctuation is actually very common. Most financial media attributed the drop to the geopolitical uncertainty between the US and North Korea. No one can be certain whether this was the real trigger, but one thing is for sure: when markets have been elevated for so long at a historically high valuation level, they become more unstable and can be more likely subject to sudden loss. We shall stay the course and respond to market trends accordingly. 

For more detailed asset trend scores, please refer to 360° Market Overview

Now that the Trump administration has been in the office for more than half a year, it has stumbled and encountered many difficulties to implement its promised changes in terms of tax cuts, job stimulation and infrastructure spending. On the other hand, stocks continued to ascend, regardless of the progress. Looking ahead, however, we remain convinced that markets will experience more volatilities at some point when reality finally sets in. 

In terms of investments, U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic on U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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