Will This Start-up Kill the ETF Revolution?

The rise of the exchange-traded fund in the past decade has proven how much investors want to have hands-on control over their portfolios. Discontented with mutual funds that left you without any ability to buy and sell during the course of a trading day, investors have turned ETFs into a trillion-dollar industry.

But now, a new alternative to exchange-traded funds may give investors more of what they're looking for. A new start-up company is looking to bypass the management fees that ETFs charge, instead giving you direct access to baskets of stocks for a single inexpensive commission -- and letting you tailor the portfolio to your own particular needs.

Building a portfolio on a theme
The start-up is called Motif Investing, and it's trying to help make it easier for you to use common sense to invest. The way it works is pretty simple: On the Motif website, you'll find dozens of different investing themes or "motifs," each of which includes a portfolio of up to 30 individual stocks that are related to that overall theme.

For instance, as of yesterday, the top-returning motif over the past year was named "Discount Nation." The trend that this motif tries to capture is one that investors have seen play out for years: As the recession took hold and the financial crisis smacked shoppers in the wallet, discount retailers thrived. Wal-Mart, which founded itself on its low-price mantra, was obviously one of the big winners of the recession. But even the discount retail giant saw competition from below, as deeper-discounters Dollar Tree and Family Dollar rose to popularity and earned substantial profits.

To invest in this or any other theme, Motif lets you execute buy or sell transactions for an entire basket of stocks for a single commission of $9.95. That's clearly a lot cheaper than you'd pay to buy individual stocks separately, and unlike some past companies that offered similar services, trades happen in real time -- meaning that you're not stuck with mutual-fund-like response times.

Total flexibility
But the real value of Motif is its flexibility. With an ETF, you're stuck with whatever stocks the manager chooses to buy, often because the index it tracks includes them. Even if you don't like a particular stock a given ETF holds, your only choice is to buy that ETF or not.

Motif, on the other hand, lets you have control of your portfolio. Don't like a stock in the motif? You can cut it out. Want to add another? No problem. Moreover, if you want to dig into the details and change the particular weightings within a motif to buy more of some stocks and less of others, Motif gives you complete flexibility to do so.

There's also a social-media element in motifs, as the service encourages sharing of ideas. But the social aspect is completely optional -- and even if the service fails to build a thriving environment of openly shared investing ideas, you can still benefit from its other advantages.

Why pay more?
If investors start using Motif's tools to their fullest extent, then ETF providers from giants BlackRock and State Street on down the line should start watching out. There's nothing stopping Motif users from creating their own motifs based on publicly available holdings lists from popular ETFs -- and by doing so, they would avoid ETF fees. Admittedly, some ETFs already have rock-bottom fees, but others have charges that run as high as 1% or more annually.

As proposed, Motif has one major downside. Because you're really buying individual stocks rather than a single bundled security, you'll have somewhat complicated tax reporting every time you buy and sell a motif. ETFs, by contrast, are treated as separately taxable units for tax purposes, and so trading them only produces a single taxable transaction for reporting purposes.

But the big question facing Motif is how it can offer its service at the minimal price it's charging. By essentially offering microtrades at as little as $0.33 per stock, Motif is effectively undercutting even the deepest discounters out there. Investors need to watch to make sure that trade execution quality doesn't suffer. But Motif has several managers and advisors with extensive experience throughout the industry, most notably including a former executive that helped push E*TRADE forward in its brokerage and banking ventures.

Take a look
Despite those concerns, Motif offers a very promising alternative to the fee-driven world of ETFs. If it can succeed as a viable business, then Motif could well become the most efficient platform for investors to use in creating their own custom-made portfolios of stocks -- all the while allowing its simplicity to make life easier for beginning investors who are often intimidated by the prospect of investing in stocks.

One theme we've looked at extensively is the power of growth stocks to support your portfolio. It may not be set up as a motif yet, but we've found three companies at the heart of the next "trillion dollar industry." Inside, you'll find the full scoop about the investing strategy we've used to double our money on 3 stocks. It's free, so click here and get access today!

Read/Post Comments (11) | Recommend This Article (98)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 29, 2014, at 6:54 AM, prginww wrote:

    Nice spin - but Folio Investing introduced this concept about buying your own basket of stocks to the market 15 years ago. They have perfected and honed the art of 'bespoke ETFs' as you like to refer to it. Amazing power of PR that "Motif Investing" managed to recast the idea and get this splashed on Motley Fool. I'm very curious as to what the mechanism for is for such marketing (I would like to engage them myself for my own purposes).

  • Report this Comment On July 30, 2014, at 5:44 PM, prginww wrote:

    I've been using Motif for about a month and there are still some bugs with the system. Nothing that that would affect your portfolio but user experience type issues. Can't change the description of my motif or the system lags at times. I really like Motif but I also like Loyal3 which allows you to buy IPOs and allows automated savings using a credit card or direct ACH on a schedule you set. In my opinion Motif should buy Loyal3 and incorporate the payment system and IPO side of the business. I was in on the GoPro IPO with Loyal3 and was disappointed that I only got 20% of the shares I thought I was going to get. I heard it was 20X oversubscribed on Loyal3. I pulled most of my money from their platform and migrated to Motif. I've been building my own Motifs and not buying any of theirs. It's a great platform for trying out investment ideas of your own. $10 to buy a basket of 30 stocks at one time, you can't beat that if you are a small investor. Schwab, TDAmeritrade, ScottTrade, Fidelity, I've used them all and I get killed by their commissions on any small trades. With motif I line up all of my trades into one neat package and trade them together. I have not been paid by either company and I do not have a stake in either company. These opinions are my own.

  • Report this Comment On July 30, 2014, at 6:02 PM, prginww wrote:

    Overcomplicating something under the guise of 'making it simpler'?

    Good grief, people! Go to Computershare!!

  • Report this Comment On September 11, 2014, at 6:23 PM, prginww wrote:

    Just saw the ceo on CNBC. Went to the web site. Hummmm.....

    The tax part has me concerned though. Leave it to the fool to always ask the right questions. So, we sell a motif at a profit. Some of the stocks did well a few lost money. Will this drive my accountant crazy come tax time?


  • Report this Comment On September 11, 2014, at 6:59 PM, prginww wrote:

    ETF's are for people too lazy to learn how to pick good companies. Unfortunately, there are plenty oh high-ranking Fools with a very...VERY...high ETF-to-stockpicking ratio that would have a very low ranking if not for the ETF's.

    One became a writer.

  • Report this Comment On September 14, 2014, at 12:29 PM, prginww wrote:

    I think Motif investment is just a collection/list of stock that have performed well and does not guaranty future performance. the key in stock market is to find companies that are leader in their sectors, continually grow earnings and return a good portion back tot he investors.

    I am not sure motif will be the killer etf.

    On the other hand, fool's rule breaker and Stock advisor have done good job. there is one problem, if you follow their advise, you need to retain stocks for a decade in that time many stock will prove to be dud. Take example of Whole Foods, down more than 50% still it makes a cut of fool's list.

  • Report this Comment On September 14, 2014, at 6:53 PM, prginww wrote:

    Yeah this sounds complicating.

    Most people should just buy a Vanguard index fund and call it a day.

  • Report this Comment On September 21, 2014, at 9:58 AM, prginww wrote:

    This is an excellent idea for longer term investors managing an IRA or other retirement account, not so good for trading or self directed investors in a taxable account. I think this would appeal greatly to the broad non investor population that tends to think along macro lines and doesnt really want to be involved in portfolio design or researching individual companies or ETF's, or the work of trading in and out of these. It's far easier just to build on an idea and allocate funds and let the program do the work of buying the stocks.

  • Report this Comment On November 13, 2014, at 6:55 PM, prginww wrote:

    like most evrything in life, seems there are +s/-s!!!!

    Iwould be concerned re taxes.....don't etfs have advantages, especially those that periodicaly rebalance???

    hope some tax-wise contributor will respond.


  • Report this Comment On December 27, 2014, at 4:47 PM, prginww wrote:

    I am investigating whether or not I should join Motif. I think, if one combines AAII's CI and Modern Graham, one should be able to create a perfect ETF using Motif's. I want to test my conception, will join Motif soon, most probably, after 01/01/2015.

  • Report this Comment On February 17, 2015, at 4:47 PM, prginww wrote:

    I have been using Motif Investing for most of 2014. The site is perfect for buying all of the Fool's Rule Breaker funds. I can buy every recommendation by making my own personal "Motif" fund. You can even by the exact same funds and allotments as my created Motif. (see below)

    The taxs are on a 1099-B form or they get you a file that works on turbo tax.

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