Investing on the cheap with ETFs

In my latest post on investment fees I compared the impact the average fees of active mutual funds vs have on total investment returns. I also compared the active mutual fund fees to those of index funds and to those of individual stock investments. That exercise was a bit theoretical in that I didn’t use a real world portfolio with typical investment allocations across different sectors. After all, 100% of an investor’s funds are not going to be in the lowest cost Vanguard S&P500 index fund. What I wanted to do in this post is see what the fees would be for a real world indexed portfolio. This will provide a good benchmark for a investor to measure their investment fees against.

Fortunately for me I found the work for this post pretty much done for me in a recent Wall Street Journal article. Thanks to Mebane Faber at World Beta for the tip. The Journal had asked Rick Ferri, author of the ETF Book, to come up with model balanced portfolios using only commission-free ETFs across various brokers. Here are the results.

The first thing to note is that there really is no reason to pay commissions to buy and sell ETFs anymore for a passively indexed portfolio. There are plenty of commission free choices across brokers as the example clearly shows. Second, the allocations presented here are standard 60%/40% stocks/bonds but with a healthy dose of foreign stocks and small caps in the mix. This is much better than the standard 60%/40% model that has a much larger percentage in large cap US stocks. Lastly, I think this is also a good comparison of the brokers themselves. TD Ameritrade and Vanguard clearly stand out in this example.

The end result is that a well diversified passively indexed portfolio can be easily implemented for zero commissions and annual expense fees of no more than 0.15% per year. This also means that the re-balancings are free. That is a good benchmark to keep in mind for your portfolio.

Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.

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