E*TRADE has decided to discontinue its collection of index mutual funds. If you hold shares of ETSPX (S&P 500 index fund), ETRUX (Russell 2000 index fund), ETTIX (technology sector index fund), or ETINX (international index fund), E*TRADE or your broker will automatically sell your shares by March 27, 2009.
Even though index funds are likely the best way for most people to invest in the stock market thanks to low fees and returns that match the index, brokerages don’t have much motivation to offer them. Thanks to the low fees, fund managers don’t generate that much income. Without that income, the managers can’t advertise as prominently. E*TRADE’s S&P 500 index fund is quite competitive, with a expense ratio of 0.09%, lower than Vanguard’s 0.15% for VFINX. But VFINX is much more popular.
E*TRADE will likely try to convert index fund customers to managed fund customers. That’s probably the only way for the company to make money. But keeping the customer in mind, I would recommend using the liquidated funds to buy the equivalent low-cost index fund from Vanguard or Fidelity.
About the Author
{ 7 comments… read them below or add one }
It could be that eTrade never actually had an index fund except by branding. I don’t know for sure in eTrade’s case, but there are “wholesale” index fund providers that others just rebrand and sell.
An index fund is run by computer and it’s cheaper to just have one provider run everyone’s index funds than for everyone to develop their own.
ETrade did indeed outsource this, to a group call World Asset Management, which is a sub of Comerica. But even if WAM did it for free (which is actually the going rate) it still cost ETrade money to “brand” the funds. They’ve got to do regulatory filings, hire accountants to do annual audits, appoint and pay a board of trustees, etc. At 9bps you have to wonder how ETrade ever thought it could make money on this. With $230M in the fund, the fees are only $207K a year, which is probably about what they had to pay the lawyers and accountants.
Fidelity’s S&P 500 fund (FSMKX) charges 0.10% and if you have more than $100K to put in they’ve got FSMAX that charges 0.07%. Both are managed in-house by Fido’s Geode group and together they’re about $10B.
Less than 30 minutes after I received and email about ETrade liquidating their index fund assets I went to Vanguard.com printed out two Roth IRA conversion forms and mailed them off by the end of the week. My only reason for being at ETrade was low cost index funds and no account or other fees whatsoever for my two Roth IRA’s, a brokerage account, and a savings account. Now that the index funds are gone and the savings account has dropped its rate, I’ve switched all my assets to Vanguard. I’ve switched all my investment funds to appropriate target date retirement funds and my fixed income assets to the Prime Money Market Vanguard fund. I wonder how many investors have my investment strategy and will leave ETrade because of these circumstances. Even if there aren’t a lot, these moves may end up hurting them a lot more than they are helping them, especially in the form of customer satisfaction.
bad timing for people wanting to ride this storm.
Thom, not necessarily. If you’re forced to sell index funds and then you purchase other index funds, then you’re coming out pretty much even. Your new index funds are going to be just as depressed in price as your old ones. However, from a tax standpoint, I am forced to reap all the tax benefits of this loss this year when I would rather not, because of my already low tax rate.
I found myself in this same spot. I had started an auto plan with etrade 2 months ago in their index funds. When I went to liquidate today etrade tried to charge me a 49.95 fee. The prospectus had a 4 month early liquidation fee. I cancelled the transaction and contacted etrade about the forced nature of the fee. They got back to my electronic message via phone the same day and said that if etrade does the liquidation (forced) the fee is waived. So if you find yourself in this situation, you can let etrade do the liquidation sans fees.
Dad
Would have been nice to tell me before converting my shares to cash at the market’s low. Time for a new brokerage.