How To Build The Cheapest ETF Portfolio

November 20, 2012

Creating an ETF portfolio at any major online brokerage firm proves that knowing what to invest in isn’t that difficult after all.

One of the biggest complaints that I hear from people about investing is that they don’t know what to invest in.

Friends and family, ranging from students to lawyers to successful technology executives, have used this lack of knowledge to justify sticking with high-fee managed mutual fund accounts or, worse, keeping all of their money in cash.

Given the amount of time I spend researching ETFs and ETF portfolios, that just seems crazy to me, which led me to create an easy guide to building the cheapest, most basic ETF portfolio you can on three different major online brokerages: Fidelity, TD Ameritrade and E-Trade.

I’ll start with Fidelity, which currently offers 31 iShares ETFs commission-free. The nice thing about Fidelity is that it doesn’t penalize you on short-term trades. If you’re planning on holding your portfolio long term, that shouldn’t matter, but I like knowing that if I need to sell off a position quickly, I can do so without paying for it.

The most basic ETF portfolio has exposure to U.S. equities, global equities and fixed income. At Fidelity, the broadest, cheapest options I’ve chosen are the iShares Russell 3000 Index Fund (IWV | A-100), the iShares MSCI EAFE Index Fund (EFA | A-91), the iShares MSCI Emerging Markets Index Fund (EEM | B-97 ) and the iShares Core Total U.S. Bond Market (AGG | A-97).

Fidelity Funds Summary

I’ve presented three sample portfolios based on those four ETFs, based on your desired risk level.

Fidelity Model Portfolios

Overall, those are very reasonably priced portfolios that certainly beat the fees charged by most (if not all) managed mutual fund accounts. You can rebalance your chosen portfolio back to target weights as frequently as you’d like thanks to commission-free trades, though the most realistic rebalancing schedule is probably annually.

You can design a cheaper—and broader—basic portfolio at TD Ameritrade, but you’ll have to contend with a $19.99 fee if you sell a position within 30 days of buying it. I’ll stick to my basic portfolio of four equity and fixed-income ETFs for comparison purposes, but I really like that TD Ameritrade offers commission-free trades on commodities ETFs like the PowerShares DB Commodity Index Tracking Fund (DBC | B-96) and the iPath Dow Jones-UBS Commodity Index Total Return ETN (DJP | B), along with a few asset allocation funds for those who would rather let iShares make their allocation decisions for them.

At TD Ameritrade, I chose the Vanguard Total Stock Market ETF (VTI | A-100), the Vanguard MSCI EAFE ETF (VEA | A-91), the Vanguard MSCI Emerging Markets ETF (VWO | C-89) and AGG again:



TD Ameritrade Funds Summary

The portfolios are cheaper here at every risk level:

TD Ameritrade Model Portfolios

The last online brokerage, E-Trade, only offers commission-free trades on higher-priced ETFs from WisdomTree and Global X, along with a few db-X target-date funds. It’s hard to build a basic, plain-vanilla portfolio here since there are very few plain-vanilla funds offered. The best you can do here is use the dividend-focused WisdomTree funds for your equity exposure and swallow the commission on your fixed-income allocation.

Etrade Fund Summary

Even the equity allocation looks expensive here, and it’s not even providing market exposure. That might be a good thing, if you’re looking for a higher-yielding, more defensive portfolio of stocks. If you’re looking for pure market exposure, however, you’ll have to pay $9.99 per trade at E-Trade.

There are also, of course, Schwab and Vanguard, which offer commission-free trades on all of their own ETFs on their own platforms. Portfolios built on either of those platforms are very cheap, but you’ll have to pay commissions on any ETFs you buy outside of their respective product suites, which don’t include any commodities or alternatives ETFs.



Vanguard charges $7 per trade on non-Vanguard ETFs, in addition to a $20/year service fee  (note: both fees drop with higher asset levels). Schwab charges a higher commission on non-Schwab ETFs—$8.95 per trade—but no annual fee.

The cheapest overall portfolio can be found on the Schwab platform using the Schwab U.S. Broad Market ETF (SCHB | A-100), the Schwab International Equity ETF (SCHF | A-96), the Schwab Emerging Markets Equity ETF (SCHE | B-97) and the Schwab U.S. Aggregate Bond ETF (SCHZ | A-99):

Schwab Model Portfolios

The Vanguard portfolio, using VTI, VEA, VWO and the Vanguard Total Bond Market (BND | A-93 ) looks a lot like the TD Ameritrade portfolio, and is also reasonably cheap:

Vanguard Model Portfolios

In sum, it’s possible—and easy—to build a good, cheap portfolio regardless of your choice of online broker.

It’s worth noting that if you are looking for more nuanced exposure, you will need to look beyond price to determine your portfolio allocations; this analysis assumes you’re looking for a simple, cheap portfolio with diversified market exposure.

At the time this article was written, the author held positions in DBC, VTI and VWO. Contact Carolyn Hill at [email protected].



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