Some of you may remember a column I wrote last July that mentioned Folio fn.com. Folio fn.com is an online brokerage that lets you create baskets of stocks and then trade them with a single mouse click. It's an intriguing idea and one that ties in nicely with the popularity of exchange-traded index funds such as the Standard & Poor's Depositary Receipts ( SPY), or Spiders, iShares and HOLDRs that trade on the American Stock Exchange. (For more on exchange-traded funds, see Everything You Want to Know About ETFs.) The stock baskets you build with Folio fn.com are a little like index shares. But, as you'll see, there's a lot of flexibility in how you may customize them. No surprise, a competitor to Folio fn.com, called NetFolio.com, is due to launch sometime this fall. Another site, unx.com, has adapted the concept for professional money managers. I'll save unx.com for a future column. For now, let's quickly compare Folio fn.com and NetFolio.com. Then we can tackle the bigger question: Does it make sense to invest by purchasing baskets of stocks at these sites?
Both Folio fn.com and Netfolio.com charge subscriptions instead of the commissions you normally pay when you buy and sell stocks. At NetFolio.com, you pay $20 per month or $200 per year; at Folio fn.com, it's $30 per month or $295 per year. NetFolio.com's headed by money manager Jim O'Shaughnessy, author of What Works on Wall Street. Using the site, you can create a basket of stocks customized to your investment objectives. Here's how it works: You deposit the $5,000 minimum account balance. Then you fill out an online questionnaire, detailing your goals and risk tolerance. NetFolio.com's computer modeling software then creates a basket containing anywhere from five to 40 stocks that meet your objectives. The software used to create that basket is similar to programs used by FinPortfolio.com and the other financial planning sites that I talked about in last week's column. You can make changes in NetFolio.com's recommended stock basket -- add or delete stocks or adjust share amounts -- before you actually buy the stocks. And you pay nothing in commissions. If you want to change your basket of stocks at some later date, you pay $20 per trade. Once a year, Netfolio.com's modeling software recommends ways to rebalance your stock basket. That rebalancing takes into account things like tax consequences of your trades and maintaining risk and growth potential at the levels you specified at the onset. If you follow the computer model's recommendations, you pay no commission charges when the basket is rebalanced. Folio fn.com has a financial celebrity of its own for a founder -- Steve Wallman, who served on the Securities and Exchange Commission from 1994 to 1997. One big difference between NetFolio.com and Folio fn.com is that Folio fn.com also lets you trade in and out of the 2,500 most active stocks commission-free as part of the site's $30-per-month package. In other words, you can hold positions in individual stocks as well as the site's stock baskets. Also, you can buy and sell individual stocks within your baskets at any time without paying commissions. Another significant difference: Instead of creating a basket of stocks for you, as Netfolio.com does, Folio fn.com lets you choose from 75 prepackaged baskets. The site calls these baskets "folios." And the baskets cover an interesting and broad spectrum of asset categories. There's a folio made up of ADRs, or American Depositary Receipts, of African stocks, for example. Another folio contains stocks of companies with the highest percentage of women investors. Still another folio holds stocks of companies that have absolutely no connection with the manufacture or sale of tobacco products. Other folios more closely resemble exchange-traded index funds since they're composed of stocks in sectors such as technology, telecommunications and so forth. And finally, you can choose folios made up of small-, mid- and large-cap stocks. As I said, you can customize Folio fn.com's folios, or create your own. And there's no minimum amount to open an account and no minimum for each trade. That should make Folio fn.com a better choice for investors who only want to put small amounts into their account each quarter. And in that case, you may actually be buying fractional shares of the stocks within each portfolio. On the other hand, NetFolio.com's a better choice for investors who would rather have a software program pick stocks for them, while still retaining the option to customize the program's choices.
The Bottom Line
But onto the bigger question: Are these services worth the subscription fees they charge? And are they a smart way to invest? Let's look at cost for starters. If you bought a traditional fund instead of a stock basket from Netfolio.com and Folio fn.com, you'd be assessed management fees averaging 1.43% annually, according to Morningstar. That means $20,000 invested in a traditional mutual fund would incur $286 in management fees each year -- roughly in line with the subscription fee Folio fn.com charges. If you have less than $20,000 to invest, Folio fn.com's and NetFolio.com's subscription fees might eat up a higher proportion of your assets than a traditional mutual fund, and you'll need to weigh whether the flexibility they offer is worth the extra cost. One additional factor to take into account: If you held your traditional fund in a taxable account, you'd have to pay taxes on your share of any capital gains and dividend income distributions. With Folio fn.com and Netfolio.com, you incur no capital gains taxes unless you elect to sell some of the stocks within your baskets. To cut to the chase: If you're a long-term investor and you believe that over the long term an index fund will perform better than a typical mutual fund (a good bet, according to this recent story), you might want to go with Folio fn.com or Netfolio.com -- more so, if you like the option of customizing an off-the-shelf folio or one created for you by a software program. But what if you're a position trader who likes to hold for periods of days or even several months? Then the dynamics change significantly. At Folio fn.com, for example, trades are only executed twice a day (at 10:15 a.m. and 2:45 p.m. EDT). At those times the site attempts to directly match the orders of its customers internally. However, orders that can't be matched are routed to the exchanges as market orders. That means you pay whatever the prevailing price happens to be. And if your folio happens to contain thinly traded stocks -- foreign stocks or micro-cap stocks for example -- you'll likely be on the outside of a relatively wide spread. As with any mutual fund, you can't be sure of the price you'll receive until after the sale takes place. NetFolio.com allows trades at any time during the day. But again, these trades are executed as market orders. A feature allowing the use of limit orders -- orders to buy or sell within specific price limits -- is in the works. So if your trading style depends on achieving gains of 4% or 5% or so on each trade, fuggedaboutit. Trading folios will eat into those gains. Indeed, if you're a swing trader, you'd be better off trading HOLDRs and index shares. Unlike folios, index shares can be shorted. Often you can use them as part of an options trading strategy. That is, options on HOLDRs and many index shares trade on the Chicago Board Options Exchange. Likewise, HOLDRs and index shares cover many of the same sectors as folios -- everything from Internet infrastructure and biotechnology stocks to actively traded Malaysian stocks. Most important, you can trade them via limit orders so you know the price you'll receive. You just can't customize them.