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Saving cash through commission free ETFs – the end of a cycle

Small investors who are at the beginning of their investing journey and do not have big pile of cash on hand face a problem how to manage their cash. You probably have the same problem if you can save only $100 or $200 monthly.

 
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What would you do with such small cash on hand?

If you start buying individual stocks, the commissions will eat you up alive. See this example:

You save and deposit $200 to your brokerage account and then buy AT&T (T). At current market it costs $34.80 a share. You would be able to buy 5 shares and spend $174.00.


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But then you get hit by a brokerage fee. I pay $8.00 for every trade. That fee will send your trade to 4.4% immediate loss. You investments will have to make almost 5% to break even. If your commissions are higher, this magnifies even more.

I hate having cash sitting on my brokerage account for long time until I save enough to buy stocks or mutual funds.

If you follow my blog you may have noticed that recently I was recommending using non transaction fee ETFs to build your cash reserves in a brokerage account before you invest them.

I have been doing this in my ROTH IRA account and I chose two ETFs which I can buy without paying commissions: RWX and FEZ. I have wrote about this investments in my previous articles “How to invest with small money” and “Commission free wealth building“.

 
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This time I would like to report how the savings went along since I am at the end of my savings cycle, ready to withdraw money from my ETF and invest them to a stock. Here are some outlines of the saving cycle:
 

  1. Over the savings time I was investing to REIT RWX ETF.
  2. I started investing into RWX in May 2013 and invested every penny I received from dividends and distributions from other stocks.
  3. I invested all small contributions not larger than $1000.
  4. Over time I paid zero in commissions.
  5. Over time I received $25 in dividends or distribution from RWX itself.
  6. I finally saved enough to sell shares in RWX and buy a stock.

 
The plan is to save at least $1200 in RWX. Then I can sell $1000, keep $200 invested, and buy a new stock while continue saving small amounts in RWX in a new saving cycle.

 
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I already saved $934.49. You can see the spreadsheet where I keep track of savings in RWX here.
 

RWX Tracker

Click to enlarge.
 
Now you may have a question. If a plan was to save 1,200 dollars in RWX, why is it OK to liquidate the position in RWX now when I only saved $934.49?

 
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The reason is that TD Ameritrade has a rule of holding the ETF in an account for 30 days to have it commission free. Another rule is LIFO rule or Last-in-first-out. That means that my last contribution into the ETF counts as first out. And that last-in-first-out must be sitting in the ETF for 30 days in order to have transactions free of commissions.

DividendsI made my last purchase on January 3rd, 2014 and I will be able to withdraw cash in February 3rd or after. But not before. During this waiting period I will be able to save additional $300 (which this time I will not use to purchase the ETF, which would prolong my waiting period, but keep it sitting in the account).

At the beginning of February I will have exactly $1200 saved – $900 in ETF, $300 cash. I will sell $700 out from the ETF, and use the proceedings and cash to buy a new dividend paying stock.

 
(MORE: A Look Back at 2013)
 

To summarize this process: I held my cash in this ETF for 5 months making a few bucks while waiting (6.20% yield and 2.7% received cash to be accurate) and although the REITs were beaten down recently, mu fund lost only 1.17% or 11 dollars and that is acceptable. I know that during this coming year, REITs will do a lot better. I like this strategy and will continue using it saving all received dividends and contributions to save enough money to be buying individual stocks for more cash than just $150 or $300 a month.

 
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Once the LIFO 30d rule expires, I will sell a portion of RWX and buy another position in a dividend paying stock.

How do you save small money to avoid fees and increase a chance to make more than savings accounts?
 





8 responses to “Saving cash through commission free ETFs – the end of a cycle”

  1. […] into Stocks – Hello Suckers! writes Saving cash through commission free ETFs – the end of a cycle – Investing small money monthly can be challenging and expensive. Instead of saving in a savings […]

  2. I hate the brokerage fees! Especially when I’m trading options. I like the idea of using no fee ETFs. It’s been quite a while Martin, love the new layout of the site.

    • Martin says:

      Marvin, thanks! Glad to have you back. I need someone to comment on my blog :) You’ve been a loyal visitor :)
      If there were more ETFs free I would invest in them, but there is not too many dividend producing ETFs free of charge out there, so have to stick with what is available. Works great so far.

  3. CI says:

    Martin,

    Interesting strategy.

    As a comparison, I use two brokers. Fidelity offers over 60 commission free ETFs and countless mutual funds that could be used here (no holding period that I know of).

    Scottrade doesn’t offer any commission free ETFs at all. However, with Scottrade, if you refer friends you can earn free trades. I won’t be paying commissions with Scottrade for the next 6 months. I’m going to start doing weekly buys, maybe even multiple some weeks, to get rid of all the free trades before they expire. It’s a nice problem to have :)

    Take care

    • Martin says:

      CI,
      I do not know about Fidelity, but I knew Scottrade doesn’t offer ETFs. They have mutual funds with no commissions but those usually require minimum investment which easily can get to $1000 or even $3000 initial investment. I was looking for an option where I can buy 1 share for 40 dollars and pay no commission. The commission free ETFs are great for this purpose. Thanks for stopping by and leaving a comment!

  4. My fees are between 10 and 12 EUR per purchase.

    In 2013 I have bought shares for 700-800 EUR per purchase

    Than the fees are 1,5% from the buying amount.

    This year, I try to buy only packages between 1.000 and 1.200 EUR.

    Then I can press the fees down to 1 %.

    Bye

    Michael

    • Martin says:

      Michael, I know, sometimes it is very tempting to buy a stock you want for a great price and you do not want to be waiting to save 1000 or more per purchase. I sometimes break this rule myself. In fast growing market it probably doesn’t matter that much, but in sideways and bear market the loss from fees can be quite big. Thanks for stopping by!

  5. Fast Weekly says:

    Thanks for sharing your strategy Martin. I also like commission free ETFs, especially for things that are more problematic to analysze….such as REITs and Emerging Markets Companies. Therefore I use VNQ (Vanguard’s REIT index) and VWO (Vanguard’s emerging markets index) to gain exposure. My stable of multinationals also provide exposure to emerging markets.

    Now that bond rates are ticking up, REITs and Emerging Markets have been selling off, so I am starting to buy in. While I think these investments make a good risk/reward balance over the next few years, I’m curious why you’re so confident that REITs will do well in 2014? Again, thank you for your thoughts

    -Bryan

    • Martin says:

      Bryan, I believe nothing will go down forever. REITs were falling because of fear of high interest rates and I believe FED won’t allow it. It would further slow economy down and make US treasuries more expensive and the US government needs cheap financing. So I think this next year we will see some stagnation in QE to keep the rates down (although FED will feed us with who-knows-what-BS) and REITs will be able to rebalance (speaking of mREITs) and profit on it. It is just my expectation and it may not materialize of course. Nevertheless I am also buying in REITs as I invest in long term and they will profit and make me money in long term. That’s why I believe, rates will not go up any significantly and investors will find out during next year. Thanks for stopping by.

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