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January 23, 2014 at 08:52 AM
After watching “The Wolf of Wall Street,” the thought of investing through a financial middleman may seem as appealing as diving into the ocean right after seeing “Jaws.”
The movie shows an extreme example of brokers gone wild. In doing so, it reveals one reason why low-cost exchange-traded funds are one of the fastest-growing areas of the financial industry. Investors have been using ETFs more and more as a way to bypass as many middlemen as possible, so they can keep more money for themselves.
While the film shows stockbrokers pitching penny stocks, there are many other ways the financial industry bites and nibbles at retail investors’ money. A major example is the $13 trillion mutual fund industry. When a broker sells a mutual fund, they get a cut, albeit one that’s far smaller than what the brokers in the movie got for their sales. Mutual funds may also feed Wall Street through commissions by turning over fund portfolios at a rapid rate. Those fees are an additional cost on top of the expense ratio and any loads levied.
So what is the cheapest possible way to invest in the market and eliminate as many middleman fees as possible? Below is a very basic portfolio of dirt-cheap ETFs with no loads and minimal turnover that can be bought commission-free from certain online brokerages. With these products you get to keep nearly every dollar of your investment.
The Mini-Portfolio
For U.S. stock exposure, the Schwab U.S. Broad Market ETF (SCHB) tracks 2,000 large-, mid- and small-cap stocks for a fee of 0.04 percent. It’s literally the cheapest fund since mutual funds were invented in the 1920s, and can be traded commission-free on Schwab’s web site.
For U.S. bond exposure, there’s the iShares Core Total U.S. Bond Market ETF (AGG). It tracks 2,000 investment-grade government and corporate bonds and has an expense ratio of 0.08 percent. The ETF has a yield of 2% and carries some interest rate risk, since the fund’s duration—which basically shows how sensitive a fund’s portfolio is to changes in interest rates—is five years. It can be traded commission-free on Fidelity Investments’ platform.
