Pick a Theme, Any Theme: Design-It-Yourself Investing

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Two weeks ago, I wrote about the Ultimate Obamacare ETF. That's what I called the SPDR S&P Health Care Services ETF (XHS), because out of all exchange-traded funds it had the most exposure to hospitals -- the biggest beneficiary of Obamacare -- while not owning any big brand-name drug companies or medical device makers, both of which will see new taxes under the health insurance law.

Soon after the article came out, I noticed this tweet from Hardeep Walia (@hardeepw):

Enrolling in the Ultimate Obamacare ETF. Nah our #motif is better.

That intrigued me. How could his “motif” be a better choice than the ETF I wrote about? And what was a motif?

A little Googling revealed that Walia is chief executive officer of online broker Motif Investing Inc., which was launched in June 2012. Backers include Goldman Sachs Group Inc.; board members include former Securities and Exchange Commission chairman Arthur Levitt and former Wall Street executive Sallie Krawcheck. (Levitt is a board member of Bloomberg LP, the parent of Bloomberg News.) The former president of ETrade Financial Corp. is an adviser. Walia, 40, was general manager of enterprise-services business and director of corporate strategy and development at Microsoft.

All right, then, definitely worth a phone call.

Pretty good, but not perfect -- that was Walia's verdict on XHS as an Obamacare play. The first thing he said about it? "XHS has a veterinary supply stock in it," which is not a factor in Obamacare. I wasn't going to argue with that. More broadly, I had to admit his "motif" was more finely tuned than the ETF I'd written about.

It has about 20 percent in hospitals, like XHS. It also has 43 percent in pharmacy benefit managers and 18 percent in generic drug makers. Generic drugs will benefit from government incentives to substitute them for brand names. It has 12 percent in electronic medical records companies, and 1.5 percent in an insurance exchange. So far this year, it's up 36 percent; XHS is up 32 percent.

Motif allows everyday investors to create what are, with a few key differences, sector- or theme-based baskets (motifs) of up to 30 stocks or ETFs for a total $9.95 commission. Investors own each stock in the basket they create and trade and can change the weightings of the stocks. In interviews, Walia has suggested his company be thought of as "the Apple App Store, but with motifs" and "as ETF 2.0."

In all fairness, XHS wasn’t made to profit from Obamacare, but to provide exposure to health care service companies, which it does well.

So far there are 120 set motifs that include many real-world themes. Here are some of the more intriguing motifs designed by the firm:

  • Lots of Likes -- the 50 most ‘liked’ brands on Facebook
  • Too Big to Fail -- the 19 financial institutions thus labeled during the 2008 financial crisis
  • Rising Interest Rates -- companies that win if interest rates rise( mostly financial services companies)
  • Couch Commerce -- companies that allow consumers to buy anything from their tablets while sitting on the couch
  • Gay Friendly -- companies that are proven supporters of gay and lesbian employees

Motif also lists some 15,000 “community” motifs made by other investors. They can be used by anyone on the site, and each has a chat room. If an investor purchases your motif, you get a $1 royalty. These homegrown motifs range from the compelling to the inane, and that's just looking through the W's:

  • Where Everybody Knows Your Name – the 30 most recognizable brand names according to Bloomberg Businessweek (shameless plug)
  • Wide World of Sports – stocks involved in the sports industry
  • West Michigan – stocks of companies based in “beautiful West Michigan”
  • What I Like – five stocks that some guy named Raul likes
  • Wearable Tech – companies involved in providing the technology behind wearable devices
  • Winner Winner Chicken Dinner – a portfolio of stocks that could be explained to a 9-year-old

Motifs, unlike ETFs, have no management fee and trade on no exchange. Investors pay $4.95 if they trade one stock or $9.95 to rebalance or buy or sell multiple securities within a motif. All trades can be made intra-day and an account can be set up with a minimum of $250.

One disadvantage of motifs compared with ETFs is that when you change the securities in them, you incur capital gains and will be taxed. When ETFs are rejiggered and rebalanced, very rarely do investors pay capital gains taxes. Walia says Motif is working on a tax-optimization solution.

Whether or not you end up using Motif, you may want to surf around its website. Making investing more interactive, social and fun is a victory in itself.

Eric Balchunas is an exchange-traded-fund analyst at Bloomberg. More ETF data is available here, and weekly ETF podcasts can be found here.

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