Your discount brokerage is a virtual money-making machine, and here’s how they do it
You walk into a restaurant and order a meal – and then you balk at the bill! The same thing happens when it’s time to pay at the gas station once you’ve filled up your tank. And you have a similar reaction when you look at your bank statement – the fees you pay keep going higher, while the interest you earn is pittance!
Wouldn’t it be nice to make some of these companies PAY YOU, instead of the other way around?
Don’t discount that thought!
Discount brokerages are in that same class of companies, whose services you likely use to build your portfolios, but whose fees always seem to get your eyeballs rolling. Well, it’s time to do something about that! If you are investing through a Discount Brokerage account – it means you are paying them (fees, commissions, interest on Margin Accounts etc.). So, why not look for the best-of-best of them, and invest IN them instead of WITH them – and earn something in the process?
Your discount brokerage is a virtual money-making machine, and here’s how they do it:
· When they sell you “Commission-Free” trades, although YOU don’t pay a cent, those trades are paying THEM – in the form of sales commissions and other income from Mutual fund and ETF managers
· When you borrow money to invest in a margin account, you pay your discount broker interest
· When you have a cash balance sitting around in your margin account, you earn next to nothing on that money, but they hold those funds in Money-market investments and earn a great deal of money on YOUR balance (for which you probably paid them interest to borrow!)
So, why not make some “real money” off your discount broker by investing in their stock?
You could either pick individual names, or opt for an entire basket of related stocks.
To invest in the best-of-breed discount brokerages, you could choose to go with either or all of the following:
· E*TRADE Financial Corporation (NASDAQ:ETFC)
· TD Ameritrade Holding Corporation (NASDAQ:AMTD)
· The Charles Schwab Corporation (NYSE:SCHW)
At the time of this post, all three of our picks have performed admirably, returning 398%+ (ETFC), 205%+(AMTD) and 226%+ (SCHW) over a 5-year period. And there are other tail-winds on the horizon that could push them even higher in the months to come, including:
· A healthy economy that could spell increased mergers and acquisition activity
· Interest rate hikes, which will mean more profitability from margin lending and Money Market Fund savings
· Retail investor confidence, which will translate into higher fee growth
Should any or all of these scenarios materialize, it would bode well for institutional and retail investors using either of the above discount brokerages.
2) iShares Dow Jones US Brok-Dea. Ind.ETF (NYSEARCA:IAI)
As the ETF pick, you might want to consider adding iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI) to your portfolio. If you wanted to leave the picking of individual brokers/dealers to the pro, and preferred to hold a broad basket of brokers, dealers, Investment advisors and fund managers through a single vehicle, then IAI might be what you should own.
A 5-year snapshot of its performance shows impressive gains of 155.68%, marginally trailing its benchmark (which yielded an impressive 159.72% over that period). However, considering that other sectors (Energy, Consumer Staples etc.) are struggling to offer double-digit gains, a triple-digit return at a low Expense ration of just 0.44% isn’t too bad a deal!
The author does not have any position in the stocks mentioned in this article.