Online brokerage Firstrade joins other major brokerage firms such as Schwab, Fidelity and TD Ameritrade to offer 10 commission free ETFs for its clients. On its home page, it touted "10 Commission-Free ETFs Cover It All". See the official Firstrade offering for more details.
Firstrade Commission Free ETFs consists of 10 funds. These funds enable participants to gain exposure to 4 major assets: US Equity, Commodity, Emerging Market Equity, Fixed Income. In this plan, the minimum holding period for each fund is set to be 1 month, which is equivalent to 30 days. If an ETF is sold within 30 days of purchase, a regular $6.95 online commission is applied.
The following is the list of the 10 ETFs:
|Long-Term Bond||BLV||Vanguard Long-Term Bond Index ETF|
|Intermediate-Term Bond||BIV||Vanguard Intermediate-Term Bond ETF|
|Short-Term Bond||BSV||Vanguard Short-Term Bond ETF|
|Small Growth||VBK||Vanguard Small Cap Growth ETF|
|MID-CAP BLEND||IJH||iShares S&P MidCap 400 Index|
|LARGE BLEND||VIG||Vanguard Dividend Appreciation ETF|
|DIVERSIFIED EMERGING MKTS||VWO||Vanguard Emerging Markets Stock ETF|
|LARGE BLEND||IVV||iShares S&P 500 Index|
|COMMODITIES BROAD BASKET||DBC||PowerShares DB Commodity Index Tracking|
|China Region||FXI||iShares FTSE China 25 Index Fund|
Further breakdown of asset classes covered is as follows:
|Asset Class||Number of funds|
|Emerging Market Equity||2|
As of May 17, 2011, this plan investment choice is rated as average based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are . It has the following detailed ratings:
- Diversification -- Rated as average (45%)
- Fund Quality -- Rated as below average (32%)
- Portfolio Building -- Rated as below average (32%)
- Overall Rating: Average (36%)
Strategic Asset Allocation is based on well known modern portfolio theory and its key features include: diversification, proper fund selection and periodically re-balancing.
Tactical Asset Allocation works on a diversified array of assets provided by funds in a plan and adjusts asset mixes based on market conditions such as asset price momentum utilized by TAA.
The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies. For comparison purpose, we also include the moderate model portfolios of a typical asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:
Performance chart (as of May 17, 2011):
Performance table (as of May 17, 2011):
|Portfolio Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Firstrade Commission Free ETFs Tactical Asset Allocation Moderate||8%||49%||5%||48%||11%||71%|
|Firstrade Commission Free ETFs Strategic Asset Allocation Moderate||17%||131%||1%||9%||7%||33%|
- Major asset class developed country stocks (EFA or VEU) is missing.
- One broad base emerging market equities ETF (VWO) is offered along with only one country (China) ETF (FXI). This is interesting but begs the question: why China only? What about Brazil (EWZ), India (INP) or Russia (RSX)?
- Commodity broad base index (DBC) is offered. This is again unique among commission free ETFs offered by other brokerages: commodity ETFs are not available in Fidelity and Schwab, for example.
- Fixed income ETFs cover mainly the interest rate risk: long, intermediate and short term bonds while nothing on credit risk side (investment grade, treasury and high yield).
- In the U.S. equity asset class, style coverage is agina uneven: small growth, mid-cap blend and large blend. What is more interesting, one dividend ETF (VIG) is offered.
To summarize, Firstrade Commission Free ETFs offer uneven coverage on major asset classes and minor asset classes. It is hard to see how these ETFs are picked systematically. We would like to see Firstrade expands its lineup in a more comprehensive manner.
Disclosure: MyPlanIQ is long DBC. MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.