Betterment.com Brings Index Funds to the Masses
If you've been thinking about getting started in investing but don't have a lot of money, an option has opened up that could ease you into the stock market.
A company called Betterment.com is essentially bringing index funds to the masses by providing a Web-based service that allows you to invest small amounts -- even just
Index funds are investment pools that buy and hold every stock or bond in a particular market index with the notion that the fund will reflect the performance of the entire market. They're offered to reflect stock indexes, bond indexes, international and real estate investment indexes.
Many seasoned investors like index funds because they usually beat the performance of actively managed funds over time. Also, index funds charge fees that amount to only about 0.2 percent of assets, versus actively managed funds that typically charge 1 percent or more.
But it has been tough for small investors to buy index funds because the lowest-cost funds simply can't afford to take small deposits. If you invested
As a result, Vanguard usually requires minimum investments of at least
Index funds have a sister product, called Exchange Traded Funds, that can hold the same underlying investments but don't impose investment minimums. But you buy them through brokers and have to pay a trading fee each time you buy or sell. Even the deepest discount broker charges at least
Betterment.com, which launched in May, changes the model by offering ETFs without the brokerage fees. Instead, you pay an annual fee of 0.9 percent of your invested assets. It doesn't matter how many trades you make.
How does that help? Consider an investor who wants to invest
The Betterment model would cost less than
(Under either model, the investor would also pay 0.2 percent average management fees on the ETF portfolio.)
"Betterment compares very well to a brokerage account where you are paying a fee for every share that you buy," said
The other bright side to Betterment's approach is that you get both stocks and bonds. Betterment gives you a pro-rata share of a basket of funds that are designed to reflect the entire U.S. stock market, plus a fixed-income portfolio that's made up of
But the Betterment approach, with its same fee formula, makes sense only for small investors or those just starting out.
If you had
The bottom line: If you had
Admittedly, you can't start with nothing at Vanguard the way you can at Betterment, and it's probably not worth switching to Vanguard from Betterment for a cost savings that amounts to less than
And it's a really bad deal for somebody with
"Paying 0.9 percent of assets gives me a headache," the cost-conscious Vernon said.
Betterment's Stein says the site is considering cutting fees for bigger accounts, but hasn't done so yet.
For now, Betterment is a great place to start, but not a place to stay.
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(c) 2010 Kathy Kristof