For the Average Investor, Folios Fall Short

By: Investor Solutions, Inc.

Investors have been buzzing about finding ways to get mutual fund diversification benefits with the flexibility of stock investing. Riding on the coattails of the recent frenzy created by products like iShares, Spiders, and Vipers, are the new “Folios”. But investors should take heed; the Folios are not all they’re cracked up to be.

This new investment breed aims to combine the benefits of both mutual funds and stocks, making the $7 trillion mutual fund industry work harder for your dollar. Much of these innovations were created to satisfy the demands of increasingly savvy investors insisting on lower prices, greater tax efficiency and pricing flexibility.

Folio[fn], a new online brokerage (, seeks to give investors the chance to put together their own mini-mutual fund or “Folios” as they call them. A Folio is a group of stocks that you can purchase in a single transaction. For a flat annual fee of $295 (or a monthly fee of $29.95) an investor can have up to three baskets of stocks. You can build your own, or buy one of the various “ready-to-go” Folios, including investments based on sectors, geography, style, social issues and more. The shares in the Folio are owned by the investor and may be sold individually.

Sample “Ready to Go” Folios

Major Market Folios Folio 30, Global, Folio Utility, Folio OTC
Investment Style Folios Large Cap Growth, Large Cap Value, Small Cap Value
Sector Folios Aerospace, Automotive, Biotechnology, Internet Services
Social Issues Folios Tobacco-Free, Labor Friendly, Enviromentally Responsible

You can buy and sell up to 50 stocks in one shot. Orders are placed in dollar amounts, not share amounts with no minimum trade amount. Investors can own partial or whole shares and there is no minimum to open an account. However, trades are limited to certain “window periods” (by 10:15am and 2:45pm) and any transaction placed outside this window is charged an additional $14.95 per trade. Dividends are automatically reinvested as long as greater than a dollar.

They’re selling investors on low costs and tax efficiency, while comparing the savings against the colossal costs of traditional funds. Well, duh! They fail to compare the low expenses of index funds. Looking beyond the hype, Folios can actually be quite expensive for the average small investor.

Lets compare the costs for the U.S. Large asset class for two sample portfolios:

FOLIO Annual Fee $295

Large, actively managed fund: avg expense ratio 0.90%

Annual expense for $100,000 account $900

Annual expense for $25,000 account $225

Vanguard 500 index fund expense ratio 0.18%*

Annual expense for $100,000 account $180

Annual expense for $25,000 account $45

IShares S&P 500 Exchange Traded fund expense ratio 0.09%*

Annual expense for $100,000 account $90

Annual expense for $25,000 account $22.50

* Does not include transaction fee


Where’s the benefit? Folios may look like a bargain for investors accustomed to the price gauging of active funds. But for those other investors who have “seen the light” and have already adopted an indexing strategy, Folios have nothing to offer to the average investor.

Folios claim they offer greater tax efficiency than mutual funds. For example, with a Folio you can choose to sell the losing stocks and realize a capital loss that can be offset with a gain. Novel idea! But why should you pay $295 a year for this. There are lots of tax managed index funds out there to help investors minimize taxes.

If you’re a buy and hold investor, you’re better off making all your one time purchases at a discount brokerage. Otherwise you get to pay the $295 every year!

Folios may be suitable if you’re a wealthy, experienced investor that likes to actively trade stocks. For example, a $500,000 account would only cost 6 basis points a year! Maybe if you’re a socially responsible investor looking for more control of company selection, Folios (if the account is large enough) may be a good substitute.

But, for the average Joe just starting out, Folios are not a great alternative. Limited to 50 stocks per “basket”, they do not offer as much diversification as a mutual fund. You’d have to create a multitude of Folio accounts to really spread the wealth around, and that can get pretty expensive.

We’re seeing an onslaught of new investment vehicles attempting to increase competition and reduce expenses. That’s good for all of us. If anything, it sheds light on the fact that Wall St. has been ripping us off for years. Investors are wising up. There are lots of choices out there, some good some bad. Adopting an index-based strategy using index funds or exchange-traded funds is always a clear, low cost alternative.

By | 2018-11-29T16:18:15+00:00 September 28th, 2012|Blog|

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