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Covestor announces 0% management fee on ETF portfolios

Jun 19, 2014 @ 12:01 am

By Joyce Hanson

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By introducing a new group of exchange-traded-fund portfolios with no management fees, online investment company Covestor Ltd. is furthering the trend of low-cost options among various products and companies in the ETF space.

Three Covestor Core Portfolios — moderate, balanced and growth — are passively managed and hold low-cost ETFs. There is no overlaying management fee with a $10,000 minimum balance.

According to the company's release, the offerings are meant for the “core” of an investor's portfolio, and are being added to Covestor's selection of more than 100 actively managed “satellite” portfolios.

Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ, expressed doubts about Covestor's no-cost ETF offer.

“If it's free, one has to question the quality of it,” he said. “If you're not spending money, then what does Covestor get in exchange other than basis points?”

Covestor chief executive Asheesh Advani answered that question by pointing out that his company's online business model is successful with retail investors who have asked for unusually low-cost beta ETFs to supplement the actively managed alpha portfolios Covestor offers.

“The price of ETFs has been dropping historically because of the commoditization of the product,” Mr. Advani said, comparing Covestor to companies such as Amazon.com, which sells just about everything that can be bought online, and Zappos.com, which makes its mark as the online shoe store to beat all shoe stores.

Mr. Advani predicted that consumers will increasingly select money management services by using a comparison-shopping interface similar to the one Amazon and Zappos offer. Like those online vendors, Covestor keeps its operating costs so low that it's able to run on competition-beating low margins, he said.

“We believe that we are ahead of the trend of bringing the price to as close to zero as possible,” Mr. Advani said.

A 6-year-old online registered investment adviser, Covestor currently has $38 million in assets under management, according to company communications director Kalen Holliday.

Ron DeLegge, founder and editor of ETFGuide.com, said young online companies in the financial services sector typically look to monetize their businesses by offering a product for free in order to capture consumer data and then “upselling” more expensive products.

“This is all about market share,” Mr. DeLegge said. “This is not surprising for companies in the financial services industry to be adopting the social media business model, which is to dangle the carrot. Look at Twitter and Facebook. They offer it for free, but there's always a cost to the consumer.”

To be sure, venture capitalists are putting money behind the drive to develop the Covestor brand. With a total of $28 million in venture capital, the company is funded by Union Square Ventures, Spark Capital, Amadeus Capital and Bay Partners, Mr. Advani said.

About 25 portfolio managers apply each month to join the platform, he said, adding that Covestor has a 50-50 basis-point split with managers who join.

(Correction: When first posted, this story inaccurately compared the Covestor portfolio of ETFs to low-cost individual ETFs offered by companies such as The Charles Schwab Corp. and The Vanguard Group Inc., without explaining that although there is no fee to manage the Covestor Core Portfolios, the ETFs within these portfolios have low fees.)

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