Wednesday, July 28, 2010

Investment Broker Ratings - Best of 2010.

While the market crash of 2008 was the worst since the 1929 stock market crash, there is a silver lining for investors. When the market plummeted in 2008, panicked investors pulled out of stocks en mass. This left discount investment brokers hurting for customers, and one of the best ways to get new customers is to lower your prices. This has led to a discount broker commission price war, which leads to lower fees - maybe!

A joint SmartMoney/Synovate survey found that the number of discount broker customers willing to switch for lower commissions nearly doubled last year. So, it's no wonder that brokers are in a race to the bottom as they cut commission fees, but does this really result in lower investing costs? Sadly, no. Brokers also realize that if they give the house away on low commissions, they'll be out of business before too long. So, they pad offerings with new fees, or they cut their services.

The result is that often times investors may pay less in commissions, but pay more overall in other fees.

That's where this joint SmartMoney/Synovate survey comes back into play. They've analyzed the results and come up with the best investment brokers of 2010, each rated on 6 criteria, and formatted into an easy to read chart of the top 17 discount brokers.

I encourage the reader to read the full results at the SmartMoney website, since they provide far more detail on each broker and the results. But here's just a little taste of those results...

Best and worst of 2010.


1. Commissions and fees

BEST: USAA (http://www.usaa.com)
WORST: Banc of America(http://www.baisidirect.com)

 

2. Customer Service


BEST: TradeKing (http://www.tradeking.com)
WORST: Sharebuilder (http://www.sharebuilder.com)

 

3. Trading Tools


BEST: Fidelity (http://www.fidelity.com)
WORST:Wellstrade (http://www.wellstrade.com)

 

4. Mutual funds and investment products


BEST:Charles Schwab (http://www.schwab.com)
WORST: Sogotrade (http://www.sogotrade.com)

 

5. Banking services 


BEST: E-Trade (http://www.etrade.com) and Fidelity (http://www.fidelity.com)
WORST: OptionsXpress (http://www.optionsxpress.com)

 

6. Research   


BEST: Charles Schwab (http://www.schwab.com)
WORST: Wallstreet-E (http://www.wallstreete.com)

 

Final thoughts.


I think a list like this is a good place to start when looking for a new broker, but I don't think it's the only place to go. I suggest using it as a jumping off place, a menu if you will. Take the top 5 or so and research them in greater detail. It's also important to know what you're looking for. For example, I use Sharebuilder and it's ranked horribly, but for what I use it's been great. I don't need 24/7 customer support. I don't need access to hedge funds or the ability to purchase gold. I buy simple index funds and ETFs, on a regular schedule regardless of where the market is at that time. I'm dollar-cost averaging for the long term. I probably wouldn't choose Sharebuilder if I was a more active trader.

It's all about what suits you and your style, because you're going to have a difficult time finding a one-size fits all discount broker.

Tuesday, July 6, 2010

S&P 500 Index Fund Comparison - Hint: Not All Index Funds Are Great!

Index funds have a lot of fans in the investing world, and it's easy to see why. They are known for their low expenses, and there's plenty of articles and studies that show index funds beat actively managed funds, but not all index funds were created equal.

Here are 6 index funds that claim to track the S&P 500 index. You'd think they'd be virtually identical. Think again.

I'm comparing these funds on only 2 parameters: Total fees (as reported by Yahoo! finance) and annual turnover rate.

Fidelity Spartan 500 Index Inv (FUSEX)


Fees: 0.10%
Annual Holdings Turnover (Jun 4, 2010) : 11.00%

Vanguard 500 Index Investor (VFINX)


Fees: 0.18%
Annual Holdings Turnover (Jun 4, 2010) : 12.00%

Schwab S&P 500 Index (SWPPX)


Fees: 0.13%
Annual Holdings Turnover (Jun 4, 2010) : 3.00%

DWS S&P 500 Index B (SXPBX)


Fees: 1.37%
Annual Holdings Turnover (Jun 4, 2010) : 9.00%

State Farm S&P 500 Index B (SNPBX)


Fees: 1.50%
Annual Holdings Turnover (Jun 4, 2010) : 5.00%

Rydex S&P 500 C (RYSYX)


Fees: 2.28%
Annual Holdings Turnover (Jun 4, 2010) : 58.00%

As you can see, not only are these funds are not equal but they are actually quite different. There's over 2% points difference in the fees, and over 50% difference in the turnover rate!

The fees I could understand, since some brokerages are going to charge more. One may not be as efficient as another, or maybe they just have higher marketing overhead. But the turnover is ridiculous on a fund that should track an index of a known 500 stocks. I mean, 58% turnover on an S&P 500 index is just insane!

There's no excuse for it. Well, I mean there is because they must be doing some fancy options or shorting voodoo in an effort to boost returns, but it isn't working. Just look at this comparison of the Schwab S&P 500 Index and the Rydex S&P 500 C:





Not only does the Rydex cost over 2% more in fees, but the turnover rate is 55% more (which means potentially higher taxes if you hold it in a taxable account) but its performance lags both the Schwab fund and the index it's meant to track!

I'm at a loss to explain why an informed investor would ever choose this fund. In fact, the performance of the Fidelity Spartan 500 Index Inv, Vanguard 500 Index Investor and Schwab S&P 500 Index is pretty much a wash:




So, I'd probably pick the Fidelity Spartan, unless only one of the others was available. But that's just me. ;-)

Monday, July 5, 2010

3 Stocks To Sell?

Often times when a bull market gets a little long in the tooth, the stocks that were heavy favorites are suddenly left in the dust. Other times, these stocks can simply get caught in a stock market reversal.

Here are 3 high flying stocks that Morningstar suggests might be due for a fall.

Opentable (OPEN)


Price/Fair Value Estimate: 2.3, YTD Total Return: 63%

Opentable offers an automated reservation system that allows restaurants to cut costs and become more efficient. It's certainly something that you could expect to do well in a recession, but at nearly two and a half times its Morningstar Fair Value Estimate it could be past its prime. It's also in a market with fairly low cost to enter, so its competative advantage may not be enough to protect it.

Cardiome Pharma (CRME)


Price/Fair Value Estimate: 1.6, YTD Total Return: 79%

Cardiome makes the heart drug Kynapid. Kynapid recently had some success with the FDA, but has come under some increased attent due to potential problems with a subset of the population. Drug stocks are always tricky for just this reason. Tread lightly.

SuccessFactors (SFSF)


Price/Fair Value Estimate: 1.8, YTD Total Return: 23%

SuccessFactors makes HR software, which is a relatively untapped market so it would seem to be nicely positioned. Unfortunately, it hasn't made a profit yet. That's not a bad thing for a speculative stock, but I like to know what I'm buying into has at least some value beyond that of stock.