Crazy new ETF-alternative (customize your own!)

[MooreBonds]

I'm not exactly sure how they can afford to do this with such a low commission (perhaps the company is selling you full/fractional shares out of their own inventory at a mark-up to pocket the difference?), but The Motley Fool has an article on a new ETF-alternative, where there is a ZERO annual expense ratio!:

Will This Start-up Kill the ETF Revolution? (BLK, DLTR, ETFC, STT, WMT)

Basically, this company offers pre-defined ETFs with portfolios listing what stocks they own - or, you can make up your own customized ETF with any stocks. The catch (and a HUGE MAJOR downside): in order to have a zero expense ratio, apparently you are buying each individual stock in that ETF as an individual purchase, rather than buying just X shares of an S&P 500 ETF (for example). So if you bought their S&P 500 "ETF", you would effective be buying 500 individual positions!!!

The good side: you can pay just a very small transaction for each security for a widely diversified portfolio.

Still, a very interesting concept. Assuming long-term, if there is a way to very simply track all of those transactions, it would be a huge challenge to ETF managers.

[photoguy]

This looks really interesting but the article is unclear as to how the company affords the trades. I'd be afraid they were selling order flow. But perhaps they are just eating the trading costs to obtain customers or have negotiated to deals to get very low cost trades (possibly using their own inventory as you suggest).

I'm not actually sure what is the lower bound on trading costs for a large company (as opposed to individual investor). But so many companies are giving away free trades that it cannot be much.

Also interesting to me is the royalty program whereby if others buy your index of 30 stocks then you get paid.

[CCdaCE]

I'm guessing bid/ask spread is where you're taking it in the shorts.

But I didn't stay at a Haul-a-Day Inn last nite, so who knows. The hard part is even knowing whether you got taken to the cleaners. How would you even calculate this if you put $100 total into 30 different shares. Just saying it'd be a lot of legwork and you'd have to know the spread over those 30 stocks over an unknown interval of time when the trades were actually executed. Tax prep. man would kill you. Maybe you could simplify the calculation to see where you're losing and end up with cheaper trades you butcher it up so your motif only consists of 2 or 5 stocks?

-CC