By Ross B., Branch Manager

Any professional athlete can attest that accomplishing a goal takes a serious commitment. Whether it be putting in extra hours at practice or mentally preparing oneself for a game or match, serious athletes understand what needs to be done in order to receive a win.

The same goes for do-it-yourself traders. They know what it takes to win and be successful in the marketplace. Just like a professional athlete’s training, traders continually work on trying to improve their trading strategies, consistency, and skills. One of the ways they do this is by creating and following a trading plan. Having a plan can help you stay focused and on track when emotions run high. Here are three things you may want to consider when creating a trading plan:

1. Find and Understand Your Trading Style
   Athletes determine their training methods based on their natural style. In much the same way this recognition of style is incredibly important for traders. I worked with a group of traders in my past that executed at least 120 trades per year. While many used technical and fundamental analysis to drive their decisions, some were clearly outside of their comfort zone and lacked the ability to trust their planning when they tried a different technique like day trading. So when you put together a trading plan consider aligning your methodology with your trading style.

2. Define your Entry and Exit Points
   I entered into a position one time that I felt would be a winner. Unfortunately, because my emotions blinded me from following my original plan I didn’t exit the position when it fell through a predefined support level. Having a clearly defined entry and exit strategy in your trading plan is important. There are times when you may have to adapt, but never let the motivation driving your trading decisions be personal and not factually based. I overcame my reluctance to close out of losing positions by using stop orders. While some traders avoid stop orders for fear of how to handle a stock “gapping down,” I found that setting stop orders forced me to follow through on my trading plan and minimized my losses.

3. Identify How to Manage Risk
   Another major error I see regularly and have been guilty of myself, is not managing risk properly. While having defined exit and entry points is one a way to manage risk for an individual investment, it’s also wise to manage risk at the portfolio level. I have seen traders who actively use margin fully extend themselves while holding only one investment. Their goal is to use leverage and volatility to ramp up their returns. While this strategy might seem like a winner during good times, it could be impossible to recover from the financial losses in your portfolio when the position moves against you.

Once your plan is in place, all you need to do is stick to it. Remember to review your trading journal on occasion to study what worked and didn’t, and measure your plan’s strategy against the success of other strategies, including more passive strategies like indexing. You may need to make adjustments, but don’t be afraid to adopt an investing or trading strategy that more closely aligns with your situation.

What do you think constitutes a good trading plan? Share your thoughts with others in the Creating a Trading Plan discussion.    

Ross B. has been with Scottrade since 2006, and is the Cape Coral, Fla. branch manager.

Commentary and opinions expressed are those of the author and not necessarily those of Scottrade. Scottrade does not guarantee the accuracy of, or endorse, the views or opinions of the author. The examples and strategies described in this blog are for information purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation.

The holiday season is already in full swing, with shoppers hitting the stores on Thanksgiving weekend and spending a record $59.1 billion according to the National Retail Federation. More and more, shoppers are willing to shop a few extra stores to take advantage of the deals offered even it means waiting in traffic and the annoying long lines to check out. As the season ramps up with decorating, entertaining and last minute shopping, you may want to consider taking a breather to review your finances. In the time it takes to hunt down the next bargain, you may be able to find opportunities to save more in taxes than you save on those last minute advertised bargains. A number of strategic moves today may make your season much brighter. Consider spending a few minutes reviewing the tips below that may help get your financial house in order before hanging the next decoration.

• Think about spending down your medical flex plan. Most plans will not allow you to carry over funds, so don’t lose what you’ve already contributed. For a list of eligible expenses, see IRS Publication 502.

• Consider your IRA today.
  • You can contribute up to $5,000 or $6,000 if you’re over 50. Traditional IRA contributions may be deductible. The deduction may be limited if you or your spouse are covered by a retirement plan at work and your income exceeds certain levels. (irs.gov)
  • If you believe tax rates will only increase in the future and in retirement, you may consider converting your Traditional IRA to a Roth IRA. You will pay income tax on amounts converted, so depending on your tax situation, you could consider a partial conversion.

• Review your investment portfolio. Have you been a stock or mutual fund collector? You may have bought a few shares of stocks or mutual funds over the years.  Are these positions enhancing your return?   Consider using our Portfolio Manager for a snapshot and analysis of your holdings.

• Consider looking for tax loss opportunities to offset realized gains. Investment losses can offset investment gains plus up to $3,000 in ordinary income, both for single and joint filers. Beware of the wash sale rule. This rule states you will realize the loss for tax purposes only if you do not repurchase the stock or fund or a substantially identical security within 30 days before or after the sale. See the Scottrade Webinar “Tax Loss Harvesting Opportunities” to determine if this strategy makes sense for your portfolio and consult your tax professional.

• Think about making charitable gifts. You may consider donating appreciated assets, take a full deduction, and possibly avoid the capital gains tax. If you prefer to donate cash, the amount is deductible up to 50% of your adjusted gross income.

• Evaluate your Educational Opportunities. The American Opportunity Tax Credit allows you to get a benefit this year for next spring’s tuition when you make a payment before year-end. For more information, see IRS Publication 970.

In less time than it took to run to the mall, you are now familiar with the options available to potentially reduce your tax bill next April. Check out the Tax Guide within the Knowledge Center for more information. It’s not a good idea to make investment decisions based on the tax benefit, so consult your tax advisor before implementing any of the strategies listed.   
 
What kind of moves do you plan to make that may help get your financial house in order before the year ends? Share your tips and tricks with other members by joining the Getting Your Financial House in Order discussion!

Disclosure: The analytical tools described in this article are for information purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision.

By popular demand…
 
Scottrade Client Education is happy to announce the newest educational resource, a series of investment and trading courses created to help guide you through the path to become a more confident self-directed investor.
 
The Scottrade® Smart Courses have been developed based on feedback from clients who expressed the need for a more structured and easy to follow path to help them advance their knowledge on trading and investing topics.  We understand that you might feel unsure of where to begin or overwhelmed at times with the robust education available in our Knowledge Center and other resources.  The Smart Courses were developed to take you step by step starting with the basics of the stock market, such as investment products and order types, and advancing into more in-depth topics, such as margin and options.
 
Whether you are brand new to the stock market or a more seasoned trader, the Smart Courses have something for you. The course guides are designed to cater to all experience levels and are separated into three different tracks according to your strategy and experience. These tracks include: Long-Term Investing, Short-Term Trading and Advanced Strategies. We also have a tools course for those new to Scottrade or just wanting to learn more about the tools we have to offer. To see an overview on what to expect from each course take a look at the Scottrade Smart Course Welcome page.
 
Ready to get started? Just log in to the Community and click on “Smart Courses” under the “Learn” drop-down menu in the main navigation bar. Choose your course, download the course guide and get started!
 
If you have any questions as you complete the lessons, feel free to post them in the Smart Courses discussion thread or contact your local Scottrade Team.
 
Not yet a member of the Scottrade Online Community? No problem! Click here to Join Now!
 
Thanks!
~ Liz

By Mark S., Tech Analysis Product Analyst

With the release of the newest version of Scottrader (version 5.7) you will find a number of new indicators to enhance your trading experience. 

 These indicators include:
 

• Average Directional Index (ADX)
• Average Directional Movement Rating (ADXR)
• Aroon (AROON)
• Aroon Oscillator (AROON OSC)
• RSI

 
We now offer two versions of the Relative Strength Index (RSI). Our previous version of RSI used Wilder’s smoothing and has been renamed RSI Wilder (RSI W). We’ve added RSI (RSI) as a lower indicator without Wilder’s smoothing.
 
To help you become better acquainted with these new indicators, a brief description is provided below along with some ideas on how to use them.
 
Average Directional Movement Index (ADX)
 
The ADX measures trend strength using values between 0 and 100. Low readings are generally associated with weak trends or trading ranges, while higher readings are usually seen in strong uptrends or downtrends. You can also use the ADX to spot trends that are gaining momentum or weakening. For example, as the ADX value moves higher from a low reading the current uptrend or downtrend may be gaining momentum, whereas if ADX turns down from a high reading the uptrend or downtrend may be weakening.  Ideally, this indicator can help you spot those stocks where opportunity is greatest – stocks that are trending.
 
Average Directional Movement Index Rating (ADXR)
 
The Average Directional Movement Index Rating (ADXR) also identifies strengthening or weakening trends using values of 0 to 100. Because the ADXR represents an average of ADX, its values don’t fluctuate as drastically as the ADX.
 
Aroon
 
Aroon is a two-line indicator: The Aroon Up line measures the strength of an uptrend, and the Aroon Down line measures the strength of a downtrend, both using values between 0 and 100. When the Aroon Up line is above the Aroon Down line, the stock’s price is moving upward. When the down line is above the up, the price is dropping.
 
Aroon Oscillator
 
The Aroon Oscillator subtracts the Aroon Down value from the Aroon Up value, and traders look for the two lines to cross above or below the zero line as a sign of a potential emerging trend upward or downward. Readings above zero indicate an uptrend, while readings below zero indicate a downtrend.
 
Relative Strength Index (RSI)
 
Traders generally use RSI to determine whether a stock or index is overbought or oversold, with RSI values falling in a range of 0 to 100. Although the common default time period is 14, short term traders are known to use periods as short as 2 days. When a stock is trending higher, buying pullbacks in a short term RSI can set up attractive entry points. This indicator can be paired with the ADX described above to help you buy pullbacks in strongly trending stocks.
 
To add these indicators to your charts in Scottrader™ Streaming Quotes, click Chart from the main menu bar. With your Chart window open, click the Indicators button on the far right. The new indicators are available in the drop-down menus for Upper Indicators and Lower Indicators.

 
Mark S. has been with Scottrade since May 2012. He is responsible for technical analysis and charting on the Scottrade® trading platforms.
 
The analytical tools described in this blog are for information purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any tool and/or security before making an investment decision.

As many of you know, I’m a bit of a history buff.  Each week I enjoy posting a discussion titled, “This Week in Market History” that gives a brief rundown of market changing events for that particular week.  With the 2012 Olympics in full swing in London, I thought it might be fun to reflect on the history of the Games and how much it has changed in conjunction with my weekly post.  Feel free to add your own thoughts on this deep history in the comments section and consider what is shaping history in the 2012 Games.

According to historical records, the first Olympic Games took place in 776 B.C. in the city of Olympia¹, but historians believe it may have been in existence hundreds of years earlier than that. It was part of a series of games (called Panhellenic Games) that cycled every four years.² Athletes came from the various city-states of the day, but they had to be Greek citizens, only males were allowed to compete, and they did so in the nude. A handful of games were represented during the Ancient Olympic pentathlon including discus, javelin, jumping and running events, wrestling, and pankration.³ Compare that to present day where athletes compete in 35 Olympic sports.  You can read more about what’s offered in STOCtern’s Opinion Poll and Discussion. The Games went into decline as Rome was rising, and it was eventually banned in 393 A.D. for being a “pagan” sport.

The early years of the modern Olympics were a time of struggle as world fairs were much more popular events at the time. It’s also important to note that the Olympic Games are not immune to politics.  They have been cancelled twice by war (World War II), and there have been multiple boycotts.⁷ Australia, Great Britain and Switzerland are the only countries that have competed in every Games since 1896.

The establishment of what we know now as the modern Olympics went into motion thanks to Frenchman Pierre de Coubertin, the beginnings of the IOC (International Olympic Committee), and the Games then taking place in Athens in 1896.⁴ Men were still only allowed to compete, but now the event was opened up to other nations as 13 countries were represented. Women were eventually allowed to compete in the Games four years later in 1900 in Paris.⁵

Women continue to make strides in the Olympics as a milestone was set this year when Saudi Arabia was the last country to allow female athletes from their nation to compete. Meaning, the London 2012 Games is the first ever Olympics where each of the 205 participating countries has at least one woman competing. London is also making headlines as the first city to host the Games three times. I think it’s fair to expect more history to be made from the over 14,000 athletes and 170 Paralympics teams competing in 26 sports.⁹

What else about the Olympics’ history do you find interesting?  Have you been watching the Games? 

Thanks,
James

1 - http://www.olympic.org/ancient-olympic-games
2 - http://ancienthistory.about.com/od/Panhellenic-Games/ss/70512-Panhellenic-Games.htm
3 - http://ancienthistory.about.com/od/olympics/p/OlympicEvents.htm
4 - http://www.history.com/this-day-in-history/first-modern-olympic-games
5 - http://www.topendsports.com/events/summer/women.htm
6 - http://www.athensmarathon.com/marathon/history.html
7 - http://www.sbnation.com/london-olympics-2012/2012/7/23/3177657/olympics-history-corrupt-scandal
8 - http://www.huffingtonpost.com/2012/07/13/saudi-arabia-women-olympics_n_1670483.html
9 - http://getset.london2012.com/en/get-set-goes-global/nation-information

Four years ago we started out as a small group of active trading clients and a couple Scottrade product specialists, emailing surveys and making phone calls to gather feedback on our trading tools. Today, we are a strong community of over 60,000 people with varying trading experiences and a dedicated team of Community and product specialists here to answer questions and collect feedback.

I’m often asked about the history of the Scottrade® Online Community, so I wanted to share the story with you all – the people responsible for making this Community the success it is today.

The first thoughts and discussions about developing the Community started in 2007. I was working in our Product Development department at the time and we were collaborating with a group of clients who formed a feedback network for Scottrade called the Active Trader Panel. It primarily consisted of surveys, emails and the occasional phone call to get more details on specific feedback. Those detailed conversations were tremendously helpful to the process and we couldn’t get enough, so we thought out a solution that would provide an easy and convenient way to get those details and keep the discussions going.

As part of the project, we wanted a more interactive way to get feedback and have group discussions about specific products and services. What started out as a solution to serve a small audience of clients and Scottrade soon became a project that would end up having a big impact on thousands of clients and Scottrade’s feedback processes.

The first invitations to join the Community were sent to the approximately 200 clients who were a part of the voluntary Active Trader Panel. Some of whom are still with us today, like the always popular Jay_in_NJ; a ScottradeELITE® user I had the privilege of meeting while attending a Scottrade® Client Education Conference (formerly known as User Summit). That's just one of the many perks of my job – forming real relationships with members and on some occasions getting to meet them in person.

After the initial “beta test” mode we were ready to start inviting more clients. We decided to start with clients who registered for a regional Client Education Conference - I believe Los Angeles was the first. I attended the LA conference the next year and was able to meet Sharptrader, along with a few more members.

At this point, all Scottrade clients were welcome to join the Community and as word spread and more and more Client Education Conference attendees joined, our numbers began to rise quickly.  What started out as a group of people connected based on their regional conference became a genuine community of influencers who not only discuss the day’s market events, but personal milestones in their lives as well.  Just as I have built lasting relationships here, so have many of our members.

We’ve experienced many changes during our time, but one thing has always remained the same; our mission to give Scottrade clients a place to provide feedback that we use for future development efforts and an area dedicated to open dialogue for learning.

I’m proud of what I look back on over these years and I’m excited to see what’s to come.  I thank all of you for being part of this journey and hope you’ll continue along this path with me.  Happy 4th Birthday, Community!

~Nina
Your Community Host
more...

By Jack N., FocusShares Communcations Analyst 

On March 30, FocusShares^® celebrated the first anniversary of the launch of its 15 Focus™ Morningstar exchange-trade funds (ETFs). Reaching that milestone is more than just symbolic for FocusShares^® and its parent company, Scottrade Financial Services. It’s been gratifying to see the acceptance of the funds among investors and advisors.  

FocusShares^® launched the 15 Focus™ Morningstar ETFs because we saw an opportunity to provide Scottrade clients and all investors with ETFs that are unique in the industry; no one else offers as many ETFs tied to Morningstar^® indexes and our funds are among the lowest-cost funds in their respective categories. Even better, Scottrade clients can trade them online without paying a commission.

Because of that uniqueness, we’ve seen a growing interest by investors and advisors in the funds, but also by the media. Articles from Kiplinger’s to Barron’s and IndexUniverse to Motley Fool have all focused on the low expense ratios, while other articles have cast a positive light on the Morningstar^® indexes.

The one-year anniversary also provides an opportunity to demonstrate the level of commitment at Scottrade in making Focus™ Morningstar ETFs successful. With 1,400 ETFs in the market, it can be difficult to get noticed. So Scottrade and FocusShares^® have started a multi-pronged initiative to raise visibility and awareness of Focus™ Morningstar ETFs. We hope these marketing efforts will help even more people learn about the ETFs, their value and why they could be a great addition to their portfolios.

For investors, the one-year mark has a practical impact: now you are able to find Focus™ Morningstar ETFs on your favorite screeners, including Scottrade’s ETF screener. Some screeners (though not Scottrade’s) exclude funds that are less than a year old. Now you can compare Focus™ Morningstar ETFs’ expense ratios and one-year performances to other ETFs and even to mutual funds. You might find that Focus™ Morningstar ETFs stack up pretty well.

If you want to learn more about ETFs in general or these ETFs specifically, you can find a variety of educational articles in Scottrade’s Knowledge Center and at FocusShares.com that can help you become more informed about how you can add these ETFs to your portfolio. The first step is to pull them up in your favorite screener and see for yourself how they compare.

When you screen for ETFs and mutual funds, what information is most important to you? 

Jack N. has been with Scottrade since 2011. He is responsible for public relations for FocusShares^®.

Our commission free ETF’s are only commission free for Scottrade clients if traded online. Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange Traded Fund (ETF) carefully before investing. A prospectus contains this and other information about the ETF and should be obtained from the issuer. The prospectus should be read carefully before investing. 

By Erik Liik

The similarities between exchange-traded funds and mutual funds aren’t coincidental. Most, but not all, ETFs owe their existence to the same federal securities law that long ago gave rise to mutual funds. So at their core, exchange-traded funds and mutual funds are investment siblings.

However, the differences between the two are significant and investors should understand them well.

Trading Shares

Mutual fund shares can only be purchased at the net asset value (NAV), which is the sum of all of the underlying securities, minus fees. Most mutual funds calculate the NAV at the end of the trading day, meaning shares can only be purchased and sold at prices that aren’t known by investors who place orders before the NAV is established. ETFs can be traded throughout the day at prices known by investors.  ETFs typically trade close to the value of the underlying of the holdings.

Investment Philosophy

Most ETF managers attempt to match the returns of benchmark indexes, minus fees. They do that by utilizing a passive management approach, meaning they purchase the securities that make up indexes, such as the Morningstar^® Large Cap Index^SM or the S&P 500. Most mutual funds are actively managed, which means their goal is to beat the returns of benchmark indexes.

Capital Gains Distributions

Both ETFs and mutual funds can pay capital gains distributions – which may be taxable events for investors. However, according to IndexUniverse, the vast majority of ETFs have never paid capital gains distributions (largely due to lower portfolio turnover); most actively managed mutual funds pay gains regularly. A Morningstar study release in January 2012, “ETFs Under the Microscope: Tax Efficiency Survey,” showed that distributions among actively managed large-cap blend mutual funds averaged 1.92 percent of fund assets each year. Large-cap blend ETFs, meanwhile, paid no distributions. The gap was even larger in other categories. Among small-cap blend mutual funds, the average annual distribution was 3.54 percent. ETFs again, were at zero.

Expense ratio

 Expense ratios act as a drag on performance – lower is better. Actively managed mutual funds tend to have higher expense ratios than ETFs.

Transparency

Most ETFs publish daily the precise securities held and in what percentages. Mutual funds disclose portfolio holdings quarterly.

So what does all of that mean? ETFs can be a powerful tool for  investors. Active traders have long been drawn to ETFs because they can be traded continuously throughout the day. Buy-and-hold investors tend to like ETFs because of their low fees, their transparency and their tax efficiency.

The fact that ETFs must be purchased through a brokerage account has been a drawback for investors who want to rebalance or dollar-cost average small sums. Commissions can make those strategies impractical. That’s been somewhat alleviated because a handful of brokerage firms now offer commission-free trading of ETFs. Focus ^TM Morningstar ETFs, for example, can be purchased commission-free online by Scottrade customers and Scottrade Advisor Services advisors.

Like any investment vehicle, mutual funds and ETFs are not necessarily suitable for everyone. Many come with major risks of investment loss. So make it a point to educate yourself about ETFs and mutual funds before you buy shares.  

Erik Liik is the president and CEO of FocusShares LLC, a subsidiary of Scottrade based in Montvale, N.J. FocusShares offers 15 domestic equity exchange-traded funds. For more information on FocusShares go to www.focusshares.com

Consider the investment objectives, charges, expenses, and risks of an ETF or mutual fund carefully before investing. A prospectus containing this and other information should be obtained from the issuer. The prospectus should be read carefully before investing. Focus™ Morningstar ETFs are commission free for those using Scottrade’s online platforms. Investors not affiliated with Scottrade are subject to commission costs. Morningstar is a service mark of Morningstar, Inc. and has been licensed for use for certain purposes by FocusShares, LLC (an affiliate of Scottrade, Inc.). The Focus™ Morningstar ETFs are not sponsored, endorsed, sold or promoted by Morningstar, and Morningstar makes no representation regarding the advisability of investing in Focus™ Morningstar ETFs

Don’t Miss These Seven Tax Tips for Investors!
 
It’s hard to believe that a new year is here and tax season is well under way.  Hopefully you have been gathering your tax documents and you are ready to file.
 
Even if you’re not, here 7 tax tips to help you get ready and to reduce your tax liability:
 
1.      Reinvested Dividends Mean Lower Tax Liability – It’s amazing how many investors end up paying too much on the sale of their capital investments.   Dividends automatically reinvested in mutual funds increase the basis in the funds sold.  If you sold mutual funds in 2011, add the reinvested dividends to your cost basis.  This tax tip will decrease your gain recognized on the sale and lower your tax liability.

2.      Add Transfer Fees – If you transferred to your favorite online brokerage, Scottrade, from another brokerage don’t forget the transfer fees can also be added to the cost basis of your stock sold, which will reduce your tax liability.

3.      Check Your 1099-B – Effective January 1,  2011, a new tax law was put in place to make it easier for you to report stock sales.  Brokers are now responsible for reporting the cost basis of your investments so you may not have to track down those records.  Since this is a new tax law, the IRS is phasing in the law so your broker will not be required to report cost basis for all transactions. Since your broker is only required to report the cost basis of equity you purchase as of January 1, 2011, you still will have to get your transaction statements together for previous purchases.

4.      Claim Your Worthless Security as a Loss– With the downturn in the economy, you may find the promising company you invested in went belly up.  Not sure what to do?  You can deduct the worthless security in the year the security becomes worthless and take a deduction as a loss.  If you found out that the company filed bankruptcy in 2011 that is enough cause to deduct the investment as a loss in 2011.

5.      Maximize Your Retirement – You still have time to make a tax move that can mean a reduction to your income.  You have until April 17, 2012 to make an IRA contribution and receive a tax benefit for tax year 2011.  You can contribute up to $5,000 plus an extra $1,000 if you are 50 or older depending on your modified adjusted gross income.

6.      Withdraw Your Required Minimum Distribution if 70-1/2 - Don’t forget April 1^st may be an important date if you reached 70-1/2.  You are generally required to start making Required Minimum Distributions from your traditional IRA by April1st of the year after you reached 70-1/2.  If the RMD is not taken you will be faced with a hefty tax penalty of 50% of the amount that should have been withdrawn from retirement.

7.      Deduct Tax Software – Did you prepare your taxes using tax software in 2011?  If you itemize your tax deductions you can deduct the price you paid for tax software.

        Keep in mind tax software guides you through tax deductions and credits and gives you added support of free one-on-one tax advice from highly qualified tax professionals.
 
So, when do you usually file your taxes?  Are you ready to take advantage of these tax benefits and get the refund you deserve?
 
For these and more helpful tax tips that save you money, go to the TurboTax Blog.
 
 Don’t forget, Scottrade customers receive a 30% discount on TurboTax® online software or a 20% discount on TurboTax’s downloadable desktop version.
 
To learn more about his offer visit the link below:
 
http://turbotax.intuit.com/microsite/home.jsp?priorityCode=3468344284&cid=all_scottrade-blog_aff_3468344284
 
Lisa Greene-Lewis is a CPA and the TurboTax Blog Manager. Lisa has 15 years of experience in tax preparation. In addition to extensive tax experience, Lisa also has a very well-rounded professional background. She has held positions as a public auditor, controller, and operations manager. Prior to becoming the TurboTax Blog Editor, she was a Technical Writer for the TurboTax Consumer Group. For Lisa, getting timely and accurate information out to our customers to help them is paramount.
 

By Erik Liik

As the adage goes, success in real estate depends on three factors: location, location, location.

In investing, I think it’s safe to say investors who want to improve their returns should focus on three factors: cost, cost, cost. OK, I realize that cost isn’t the only component to investment success, but it’s an important one.

Investors should appreciate that every penny charged in fees is a penny lost in their investment returns. And pennies can add up quickly.

That’s why I like the exchange-traded fund industry. In general, ETFs have low fees, as expressed by expense ratios. Expense ratios essentially are the charges imposed by investment managers to pay for running the funds. All things being equal, the lower your expense ratio, the higher your return.

But investors shouldn’t look just at expense ratios and assume that’s the end of the story when it comes to costs. Pull back the curtains a bit, and there can be other charges.

Most ETFs are passively managed. That means they track the price and yield performance of an index. The majority of ETFs track indexes developed by third parties. For example, at FocusShares we track indexes created by Morningstar, Inc. But there are scores of other indexes tracked by ETF providers.

An ETF that tracks an index has one big responsibility: making sure that the fund’s returns match as closely as possible the returns of the underlying index.  But that job isn’t easy. Corporate actions, such as dividend payments or mergers, happen every day. Managers of passively managed ETFs have to adjust their portfolios quickly and accurately to reflect those actions.

Investors would do well to look at how closely an ETF matches its stated underlying index. Fortunately, it’s not difficult to find that out. ETF providers are required to report (and most do on their websites) the performance of their funds relative to the underlying index. If an ETF isn’t measuring up, it could cost you more than pennies.

One potentially big cost to an ETF comes at the very moment you purchase it. ETFs trade on a stock exchange, just like individual stocks. That means they have bid and ask prices – or the difference in price between buying and selling shares. The difference between bid and ask prices is called the spread. The wider the spread, the more likely it will be that investors might pay a premium for an ETF. So a narrow spread generally benefits investors.

The final significant cost comes with commissions. Whether you’re an active trader or a buy-and-hold investor, keeping your trading costs as low as possible is an important objective. A number of ETFs can be purchased commission-free. For example, FocusShares offers 15 Focus Morningstar funds commission free through a Scottrade brokerage account.

I’ve been associated with ETFs for about two decades for one simple reason: ETFs provide investors of all sizes with maximum investment options at the lowest costs in the investment world. But you shouldn’t just dive into ETFs (or any investment for that matter), assuming you’re getting the best investment deal, because even among ETFs there are differences.  Small fractions of a percent can add up to big differences in investment returns over time. That’s why investors should consider the full cost of all investments before deciding what to buy.

Erik Liik is the president and CEO of FocusShares LLC, a subsidiary of Scottrade based in Montvale, N.J. FocusShares offers 15 domestic equity exchange-traded funds. For more information on FocusShares go to www.focusshares.com

Consider the investment objectives, charges, expenses, and risks of an ETF or mutual fund carefully before investing. A prospectus containing this and other information should be obtained from the issuer. The prospectus should be read carefully before investing. Focus™ Morningstar ETFs are commission free for those using Scottrade’s online platforms. Investors not affiliated with Scottrade are subject to commission costs. Morningstar is a service mark of Morningstar, Inc. and has been licensed for use for certain purposes by FocusShares, LLC (an affiliate of Scottrade, Inc.). The Focus™ Morningstar ETFs are not sponsored, endorsed, sold or promoted by Morningstar, and Morningstar makes no representation regarding the advisability of investing in Focus™ Morningstar ETFs.