Amerivest

Recently Ameritrade began to offer an asset allocation program, called Amerivest, with exchange traded funds.

The last time I wrote about Ameritrade I got a call from a VP of something apologizing for bad service I mentioned in the article. The fact is I only get correct information about half the time I call in, which thankfully is not that often.

I spent some time on the Amerivest website and talking with a rep at Ameritrade to learn more about the product, I did not go through the process of opening an account, nor am I likely to.

The demo on the site gave an indication of the risk tolerance questionnaire and nothing stood out being particularly unique, which isn't a bad thing.

I saw in the demo some example allocations. I asked the rep I spoke to, Carl, if what I saw might be a possible allocation and he said yes. Carl also addressed several other questions too.

First they only use iShares. The problem with that is there are ETFs from several other companies that may better than the corresponding iShare. I asked if the planning software would ever pick a sector ETF like Dow Jones Health Sector (IYH) or a specific country ETF like iShares Canada (EWC). I never got a straight answer after two tries at that one but I Carl left me with the impression that they would not at this point pick those types of narrow ETFs.

Amerivest currently uses about 30 ETFs, according to Carl, all of which are fairly broad based.

A big potential flaw I saw in the demo, that Carl corroborated could happen, is overlap. One of the sample allocations had iShares S+P 500 index (IVV) and iShares Russell 1000 (IWB). The problem with this is that IVV and IWB have almost a perfect correlation because they both have the largest 500 US stocks in them in a cap weighted fashion. The point of diversification is to capture different parts of the market in response to current events. Some parts of the market do well in rising rate environments, or at the end of an economic cycle and so on. IVV and IWB will react the same way to everything that moves capital markets. Whatever a person may need to have allocated in big cap can be accomplished with either IVV or IWB, for that matter OEF captures the same effect too. I wrote the other day that I would go with Rydex Equal Weight S+P 500 (RSP) over all of them for now.

Amerivest offers a rebalance feature. I asked Carl what I think was three times what the trigger is for rebalancing the account finally he said a 1% deviation would cause a rebalancing. I can't believe that could be true but maybe it is.

Lastly there doesn't seem to be any sort of ongoing active management of the product, at least Carl left me with that impression. I asked if nothing changes in the next ten years with my situation what types of changes would there be in the portfolio. Carl said the rebalancings and then he offered something about the bond allocation favoring shorter dated ETFs currently but I don't know what catalyst would switch that to longer dated bond ETFs.

My conclusion is that in its current state there isn't much value here. A do-it-yourself investor, and that is mostly who Ameritrade deals with, that does minimal reading will be more proactive than Amerivest is currently wired to be.

I can see this evolving to include more ETF families, and more strategic management in the future. Carl also left me with the impression that Amerivest will evolve, if it does I will revisit my thoughts on the product at that time.