Don't fear exchange-traded funds as they can lower your annual commission costs
Q I am 47 and work full time. I have about $250,000 in my 401(k) and about $150,000 in my IRA from a previous employer. I have invested in the Couch Potato portfolio and in the IRA, and in the past few years have moved to the Margarita portfolio (I am a Parrothead).
I was going to split $85,000 into your Six Ways Building Block portfolio until I discovered that the Vanguard Energy fund requires a $25,000 minimum. Since Vanguard will have $70,000 of the $85,000, will it let me invest less than the minimum in the energy fund? -- V.R., by e-mail
A No, it won't let you invest less than the minimum, but there is an alternative.
Vanguard also offers an exchanged-traded index fund that invests in energy stocks. Its ticker symbol is VDE. You can learn more about it by going to morningstar.com and entering VDE in the quote box. You'll have to pay a commission to buy or sell this fund, but there is no limit on the size of your investment.
The expense ratio for the ETF is 0.25 percent. It was recently selling for about $80 a share. That means 100 shares would cost about $8,000. If you paid a commission of $12 to buy it, it would add 0.15 percent to the cost.
You might also consider the SPDR Energy index fund (ticker: XLE). It has been around longer and has the same expense ratio. The difference is that VDE tracks the MSCI Investable Market Energy index, while XLE tracks the energy stocks in the S&P 500. Both are market capitalization-weighted, so the largest domestic energy companies dominate both indexes. ExxonMobil, for instance, is the largest holding in both and accounts for 22.26 percent of VDE and 22.82 percent of XLE.
I know lots of readers are comfortable and familiar with mutual funds, but uneasy about ETFs -- particularly since you have to pay a commission to buy them. But commission costs with online brokers won't be much of a factor for investors with accounts of $50,000 or so. If you'd like to explore the impact of commissions, visit my online ETF Portfolio Cost Calculator at scottburns.com.
My friend Paul Farrell, who writes for Marketwatch, has been critical of ETFs, seeing them as new vehicles to generate brokerage commissions. I share his fear they will be misused that way, particularly as the number and variety continue to climb. A fairly lazy Couch Potato investor, however, won't have much turnover.
Using my online calculator with your $85,000 split between six ETFs and assuming a $12 brokerage commission and annual rebalancing, your annual commission cost would be $72. That's 0.08 percent of portfolio value. If you could substitute Vanguard index mutual funds for some of choices, your cost would be less.
Q I am 66, have made some money, and am a saver/investor. My big brokerage firm put me in a government fund that I now find out is poorly rated. My other big broker churned my daughter's accounts, causing a tax problem for no reason. My discount broker gave a bad recommendation on a real estate investment trust without doing any research. My bank charges 1.5 percent to manage money.
I have learned to buy mutual funds from Vanguard or Fidelity, Treasury bills and notes from Treasury Direct.gov, bonds from a discount broker, and CDs from credit unions.
I want to guide a younger person to these sources, but I'm not a financial adviser. Where do you find a financial adviser that charges by the hour and not commissions? -- D.C., San Antonio
A When major brokerage houses look for new talent, their priority is not to find people with experience in a field that might give them knowledge to enhance the financial advice they dole out. They look for people with prior sales experience because that's what the conventional brokerage business is about. Worse, the only way salesmen can make a living is by moving your money from one product to another, generating commissions.
Check with the National Association of Personal Financial Advisors. They work on a fee-only basis, charging by the hour to give advice. They may also charge as a percentage of assets managed for portfolio management services. Go to napfa.org, and you can fill out a form that will generate a list of NAPFA members in your area.
Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com. 
