Covestor and CVIM Blog

Scheduled Site Maintenance

We will be performing scheduled maintenance tomorrow morning at EDT 3:00am / GMT 8.00am.

This maintenance should take 30-45 minutes. During the maintenance www.covestor.com will not be available.  We apologize for the inconvenience. Should you have any questions, please contact us.

Introduction to Exchange Traded Funds

Exchange Traded Funds (ETFs) have become a very popular form of investing over the last decade. These funds have substantially lower management fees compared to mutual funds and are traded just like a stock on the open market.

In 2006 Ultra ETFs emerged onto the scene which gives the classification of "double" the performance as they are leveraged to compound gains. For example a investor could purchase the QQQQ which is the ETF tracking the NASDAQ 100, or they could purchase the QLD which tracks double the performance of the same index.

Ultra ETFs tpyically have slightly higher management fees than a standard ETF, typically charging around .95% per year. Furthermore, the risk associated with buying an ultra ETF is realized at twice the norm. Just like buying on margin, every investor should have a set strategy before taking a position in an Ultra ETF.

Here on the Covestor Community several members have discussed ETFs in their recent blog posts. These posts should provide further insight into the strategies behind these leveraged investments:

• Inverse ETFs - Trade vs Sentiment by epicadv
• Triple ETFs - How to Trade Them by marketedge360
• Using Proshares PSQ Instead of Proshares QID by fjpenney

While most investors like to buy "long", betting that the market will go up, there are also ETFs setup to bet "short", or that a market index will go down. These are known as inverse ETFs, and they too have become increasingly popular over the recent years. The QID for example has a 2x inverse effect of the NASDAQ 100 index.

With that said, there are many ETFS to choose from. On my personal blog, stocktradingtogo.com, I have summarized a good majority of the ETFs available on the market today:

• 40 Great Inverse ETFs For Bearish Investors
• 24 Great Ultra Long ETFs For Bullish Investors

Like any investment the more educated a trader is on what they are looking to invest in the better off they are. This is especially true in today's volatile marketplace.

Data Team Post: Updated Alpha and Beta

We have updated the Alpha and Beta calculations today so thought we would take the opportunity to explain more about these measures and how we calculate them. One of our members had spotted a technical bug in the calculation, which you can find displayed on each members fact sheet. Simply described Alpha and Beta are used to help anticipate the future performance of a chosen portfolio.

Beta is a risk measure.  It essentially quantifies the sensitivity of the portfolio’s returns to the underlying benchmark. The value is therefore expected to be a predictor of the portfolio’s returns relative to the market, a value less than 1 implying lower volatility and greater than one implying greater risk.

Mathematically, beta is the slope of the least squares regression of the fund’s returns vs the index returns. This is the calculation we use:

Alpha is a measure of relative return. It is a metric of out/underperfomance relative to ones benchmark. The formula measures the difference between the return generated by the portfolio and that generated by the index, taking into account the beta (i.e. the risk the portfolio manager has taken to achieve this return). A positive alpha means that the portfolio has outperformed the chosen benchmark, where a negative alpha implies the portfolio has underperformed.

Mathematically, alpha is the intercept of the least squares regression of the portfolio’s returns versus the benchmark returns. We use the following formula:

If you have any questions, or views on how we can improve the performance calculations overall we would love to hear from you

Covestor Community Manager: Blain Reinkensmeyer

We are delighted to announce that Blain Reinkensmeyer, author of popular stock blog StockTradingToGo has joined Covestor as our Community Manager.  

Blain is uniquely experienced for the role. He has built up his own blog/forum to nearly 5,000 members worldwide, and formerly worked as a community moderator for both YoungEntrepreneur.com and for our friends at Investopedia.com. In his spare time he day trades actively on his own account, writes his blog, and somehow also finds time to teach hockey to local kids.

Blain is joining us to help to attract and build the reputations of the great self-directed investors on the site. He will be responsible for all community contact, and for increasing the value of the community to members. If you have any questions or feedback, feel free to mail him directly. We are excited to have him on board.

Scheduled Site Maintenance

We will be performing scheduled maintenance tonight beginning at 03:01 AM EST / 00:01 AM PST.  The Covestor website will be unavailable for approximately 90 minutes during this time. We apologize for the inconvenience. Should you have any questions, please contact us.

TD Ameritrade Broker Link Update

As you may be aware if you use TD Ameritrade as your online broker, they have recently instituted some new security measures in the form of four additional questions that users have to select and provide answers for on TD Ameritrade's site. 

If you are setting up an account on Covestor, or have an existing account with Covestor using TD Ameritrade for automatic import, you will therefore also have to share your answers to these questions on registration (or enter them in the 'broker settings' in your account if already registered). Once entered your broker-link connection will be established/re-established shortly thereafter.

Apologies for the inconvenience. Please contact us if you have any questions about this change.

Covestor Raises Series A Funding

Today we announced the close of our Series A funding led by Union Square Ventures (USV) and Spark Capital. They are joined by one of Europe's leading technology investors, Amadeus Capital Partners. Between them these firms have over $2 billion under management.

This a great news for the team here and for all of our members. It will allow us to build out our asset management platform, enabling users to invest alongside the brilliant self-directed investors on the site, rather than in expensive managed funds.

We have already been hugely impressed by the individuals who have joined us. Todd Dagres of Spark, and Albert Wenger of USV have joined our board of directors, Anne Glover of Amadeus has joined as a board observer. We chose to work with them as they share the passion of the team here at Covestor. A big thanks to them, and to all of our friends on the site.

Bernanke And The Fed

With the emergency 0.25 point rate cut over the weekend, and the news that JP Morgan have bought Bear Stearns for $2/share (a valuation of c$235m) it is going to be an interesting week in the markets.

A number of members have already shared their views on what falling interest rates and a weakening dollar mean, both for the economy and for their portfolios. We are highlighting a number of these as they are well worth checking out.

Views on Bear Stearns from:

• StockMarketBeat
• BobsAdvice
• Mooney

More general views on interest rates and market volatility from:

• bnbien
• DeeFree
• GraySwan
• wong55
• fredwilson

Keep the commentary coming - we will do our best to highlight it throughout the week, both to others members and to journalists.

Understanding Portfolio Returns

We have recently been asked by a couple of members to clarify the individual stock return calculations, as these did not reflect the single stock returns they were seeing in their online broker accounts. We thought we would therefore take the opportunity to clarify how the return formula works.

The key difference between an online broker's formula and that used at Covestor is that where your broker likely uses a 'simple return' calculation, at Covestor, just as institutional mutual funds do, we use Time Weighted Returns.

As opposed to being the absolute % cash return that the lead member realizes, the Time Weighted return figure is designed to reflect what someone would achieve if they invested a fixed amount alongside that member. In other words even if the leader adds or removes cash from their account, the portfolio of the follower simply rebalances to reflect these changes (rather than increasing or decreasing in size as that of the leader does).

One important implication of this for a leader is that In some situations this calculation can mean that even though you have made money, the return figure in your portfolio may, correctly, show no gain or a loss. As above this is because, the Covestor return calculation accurately reflects the return someone else would make if they put a fixed amount of money into your portfolio over whatever period it is measured (i.e. they do not follow you in adding to, or reducing, the size of the position over the life of your holding)

Take for example the following scenario:

1. You have an account with $10 and you invest it all to buy 1 share of XCorp at $10
2. The price drops to $9.50
3. You then decide to add in $190 new cash to your account, and use it buy 20 more shares of XCorp
4. The price rises back to $10
5. You sell all 21 shares of XCorp for $210 
6. You made $10 profit (i.e. a simple return of 5% on a $200 investment)

But for me tracking you with $100

1. I have been following you and decide to invest $100 in tracking your portfolio.  I therefore buy 10 shares of XCorp at $10 mirroring your portfolio
2. The price drops to $9.50
3. You buy the new shares. I wished to follow you with $100 so although you have increased the funds you have in this position, I don't commit $1,900 more to tracking you. I check my portfolio holdings to make sure my % allocation continues to mirror yours.  As you still have 100% of your funds in XCorp and I already have 100% of my 'tracking funds' in XCorp, I do not do anything in continuing to mirror you.
4. The price rises back to $10
5. I keep following you and when you sell 100% of your shares, I also sell all my shares, at $10 each for a total of $100.
6. I made $0 (i.e. a simple return of 0% on $100 investment)

The issue is that followers do not put money in and take it out as you do. That's not what investors do - in the offline world they just invest a fixed amount in a fund. When we shortly include tracking of cash in your account this difference will decrease - but never go away - as you can add to or reduce the amount of cash sitting in your broker account.

Both return figures are 'correct' - the one applied on Covestor is more valuable to other members following you, in showing what they can truly achieve. Our job is to put you on a level playing field with the so called 'pros' and so many of you are doing such a great job we can't wait to turn the 'return' figure into a reality for your following.

Four New Brokers Enabled For Automatic Import

We are working hard to add new brokers for automatic import, and are delighted that four new brokers have just gone live on the site. On registration you can now select these in the drop down list, to have your account on Covestor update automatically.

The four are:

1. Merrill Lynch Direct
2. Banc of America
3. TradeKing
4. Cybertrader

If you are an exisitng manual member using any of these brokers and wish to upgrade to automatic import let us know and we will enable this for you. As ever keep requests for new brokers coming through, and we will continue adding to the list.