Why Covestor launched ETF portfolios with no management fees


This week, Covestor unveiled our Core Portfolios that give investors diversified exposure to the markets, and don’t charge any management fees. Understandably, there’s been some excitement and disbelief over this announcement, so we thought it might be helpful to address some of what we’re hearing, and answer some of the common questions.

These portfolios, which use ETFs for the underlying building blocks, are designed to cost investors as little as possible in terms of overall fees. It’s a move that has been in the works at Covestor for some time, and we have been running the portfolios internally before we released them to the public.

We wanted to put out a quick blog post to respond to some of the early feedback, and answer some of the common questions we’ve heard:

  • What are the Covestor Core Portfolios? We designed these portfolios to provide investors with broad exposure to the markets, at the lowest cost possible. Typically, “core” portfolios are comprised of passively managed investments such as index-tracking ETFs. Core portfolios generally give investors index-based exposure to stocks, bonds and other major asset classes. In the core, investors are trying to mirror the market, not beat it.
  • Are these ETFs? No, the Covestor Core Portfolios are not individual ETFs. Rather, they are portfolios of ETFs.
  • How much does it cost to invest in the Covestor Core Portfolios? The portfolios have zero management fees. Investors pay only the expense ratios of the underlying low-cost ETFs in the portfolio and trading commissions when the portfolios are initially purchased and periodically rebalanced. Total trading commissions are currently estimated at about $20 annually.
  • How can Covestor afford to not charge management fees on these portfolios? Covestor is an online marketplace offering well over 100 portfolios. We offer a broad lineup of low-cost, passively managed portfolios that are suitable as core holdings. We also make available to investors a diverse mix of actively managed products that try to outperform indices rather than track them, and that charge somewhat higher fees. This variety of portfolios allows investors to implement a wide range of investment strategies, such as Core-Satellite investing that combines passive and active portfolios.
  • If it’s almost “free,” how can it be good? The reality is that diversified core portfolios are increasingly becoming a commodity because they’re relatively easy to create and maintain. We already have the technology in place to create these “plain-vanilla” portfolios, so we simply had to put in some human effort to make this happen. We weren’t building an entirely new business based on these core portfolios.
  • If you’re not making any money on the portfolios, then why launch them? We launched Covestor Core Portfolios with no management fees because our clients were asking for low-cost core strategies. Quite simply, it was the right thing to do for our clients.

There are other online investment advisers offering similar core portfolios that charge management fees. In some cases, those core portfolios are the only investments that these firms manage. Covestor, on the other hand, is an online marketplace where investors choose portfolios that are replicated in their own separate accounts (enabling full transparency into every position, trade and fee.) As mentioned, we have many different types of portfolios, with management fees ranging from zero to around 2% for some actively managed portfolios. We have three Covestor Core Portfolios. That’s only a tiny slice of the more than 100 portfolios on our investment platform.

The bottom line is that the new Covestor Core Portfolios are part of our ongoing mission to provide low-cost investment solutions that meet real investor needs. We’re disrupting the traditional financial model in favor of a more transparent marketplace for consumers. When our clients win, we win, so adding something that Covestor clients have long asked for was a no-brainer in that endeavor — even if it means we’re not making money from it.

As always, we’d love to hear your feedback on what we’ve created.

You can try Covestor’s investing marketplace platform with a free trial account or contact our Client Advisers with your questions at 1.866.825.3005.

DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. All investments involve risk, the amount of which may vary significantly. Past performance is no guarantee of future results.