Fidelity, Schwab Fund Fee Clash Continues February 21, 2019 Adviser Fund Update Print Fidelity, Schwab Fund Fee Clash Continues The fee war remains red hot among the fund industry’s behemoths, with Fidelity Investments and Charles Schwab due to add hundreds more commission-free ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. to their lineups by the end of this month. The two firms will be making a range of global, emerging market, fixed-income and sector ETFs free to trade. Following the moves, both Schwab and Fidelity will each have made more than 500 commission-free ETFs available to investors on their brokerage platforms. Schwab’s batch includes offerings from Aberdeen, Invesco, JP Morgan and PIMCO, as well as BlackRock’s iShares. Meanwhile, Fidelity is making a greater number of iShares ETFs commission-free. The Boston-based asset manager said it also plans to add a variety of smart-beta and active ETFs to this number from more than 10 asset managers and ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. providers in the coming months. This move is the latest in a series of price-cutting tactics by fund companies competing for market share. Recent maneuvers have included Vanguard eliminating transaction fees from 1,800 ETFs last July, which was countered by Fidelity’s first zero-fee index funds in August. Vanguard responded by lowering the required minimum investment and enacting a plan to move investors into its lower-cost Vanguard Admiral share class in November. Fidelity’s zero-fee gambit in particular grabbed investors’ attention: The firm saw $6.6 billion in inflows in the two months following the decision, and added two more zero-fee index funds to its lineup before the end of 2018. Lower fees and no-commission trades are a boon for do-it-yourself investors keen on researching and managing their own portfolios. As it becomes less expensive to trade and own a greater number of funds and ETFs, shareholders benefit by keeping more of what their investments earn over time and being able to choose from a wider universe of low-cost funds. While low costs alone are not a good indicator of an investment’s quality or return potential, when paired with a solid fund or strategy, they can be a contributing factor to better returns over time. Portfolio Manager Spread Too Thin? What Investors Need to Know As we often note, Adviser Investments believes in buying the manager, not the fund. Successful investing is a skill, and identifying and sticking with outstanding portfolio managers is one path to achieving your long-term investment goals. Is it possible to have too much of a good thing? We’re not the only ones with an eye out for excellent portfolio managers—fund company executives, large institutional investors and informed individual investors are all in on the hunt. Managers who display consistent outperformance tend to accrue more money to manage, whether by taking on additional portfolios, becoming subadvisers to other funds or owing to their success growing the assets they manage. Hearing this, it’s natural to wonder: Can a manager be spread too thin? Here’s the crux of the issue: Most portfolio managers focus on researching individual companies. Successfully identifying stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. with high growth potential or those that are undervalued by the market is no easy task. When such a diamond in the rough is uncovered, it’s generally worth a manager’s while to dig deep and take a sizeable position in it. But what amount counts as “sizable” can make a big difference in outcomes. If a portfolio manager running $1 million in assets wants to take a 5% position in a company, they’ll have to buy $50,000 of the stock—merely a blip in a day’s trading volume for most publicly traded companies. For a $10-billion fund, that same 5% stake costs $500 million. That’s the kind of trade that draws attention and potentially even moves markets (note that this phenomenon is far more of an issue for actively managed stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. funds than it is for index or fixed-income funds). Merely moving into the stock will tend to drive its price up. And when the manager wants to trade out of a stock, they’ll have to move carefully (and slowly) to avoid driving the price down as they reduce their stake. This is why fund companies such as Fidelity and Vanguard have large numbers of skilled traders on staff not just to mitigate the impacts of their trades, but also because moving large chunks of money around brings greater potential for unintended consequences. One way to avoid moving markets is to invest in larger, more liquid equitiesThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid.. When we research managers, we look to see if the average market capitalization of the stocks (the total market value of a company’s shares outstanding) in their portfolio is increasing along with the size of their fund (and/or all funds run by that portfolio manager). If the two trend up in tandem, it’s a sign that the fund’s increasing assets may be forcing the manager to focus more on not rocking the boat instead of plunging full steam ahead into their best ideas. Academic studies have repeatedly found that as overall fund size increases, performance suffers. A 2014 paper by economists from Emory University found that smaller funds consistently outperformed larger funds by about 0.13% to 0.18% per month over a 20-plus year period through 2012. The concentration of assets in a fund can be another clue. If the number of stocks in the portfolio ticks steadily up as the portfolio grows, it may indicate that a manager is adding names because they can no longer buy more of the stocks they already own. Similarly, if the proportion of a fund invested in its top holdings shrinks, it suggests a manager is watering down the portfolio, another signal that asset size is swaying investment strategy. So what does that mean for you as an investor? Here are a few key takeaways: Big isn’t always best. Everyone likes to see their assets grow, but if a fund’s bulking up coincides with the portfolio changing character or performance leveling off compared to the benchmark, it may mean the size of the fund is getting out of hand. Success doesn’t always last. It’s not just about picking good managers once and declaring a job well done—you need to pay attention over time and keep an eye out for warning signs that a manager’s being forced to play outside their strengths. If warning signs appear, don’t be afraid to act. Adviser Investments keeps close tabs on our managers and will trade out of funds if we determine that a manager’s skills have deteriorated, the fund has grown too large or the fund’s personnel or mandate change to shareholders’ detriment, among other factors. Staying small isn’t always bad. While a fund closure can be a big inconvenience, we’d rather have one of our managers shut the door to new investors or place limits on inflows to protect existing shareholders than allow the fund’s size to balloon unchecked. “Soft closes” (new assets are accepted from existing shareholders) or “hard closes” (no new assets) allow them to focus on managing the portfolio to the best of their ability instead of having to manage the large inflows and outflows that accompany rapid or sustained asset growth. So, can a manager be spread too thin? Absolutely. That’s just one reason why Adviser Investments research and investment team works as hard as it does to spot the early warning signs and take action to protect our clients’ best interests. Triple Tax-Advantaged Investing: Health Savings Account The April 15 deadline is just two months away: You still have time to max out your 2018 health savings account contribution! Given that the average couple today can expect to spend almost $300,000 on health care during retirement, it pays to put in as much as you can every year to capitalize on the power of tax-deferred compounding. In this episode of The Adviser You Can Talk To Podcast, three of our experienced financial-planning professionals discuss these potent tax-advantaged savings accounts and how they should figure in your investing for retirement Click here to listen to “Triple Tax-Advantaged Investing: Health Savings Account” now. To keep up with every new episode of The Adviser You Can Talk To Podcast, we encourage you to subscribe today and be notified whenever a new episode is released. Happy listening! About Adviser Investments Adviser Investments is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, with particular expertise in Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. Our minimum account size is $350,000. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868. This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations, personal investment advice or considered an offer to buy or sell specific securities. The views expressed in this update are subject to change at any time. Mutual funds and exchange-traded funds mentioned herein are not necessarily held in client portfolios. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2A, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. 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