And now just this week, FocusShares entered the game by launching 15 of the lowest cost ETFs ever offered in the public markets. (They also trade for free at Scottrade.) You can own the S&P 500 for 0.05 percent annually and no trading costs? What has Wall Street come to? Real value?

This revolution is good news for the everyday retirement investor. Gone are the days of having to sort through mutual fund brochures and Morningstar ratings. Now the big challenge is to analyze the free-trade allure to discover the best ETF building blocks worthy of their retirement dollars.

How should an investor decide which ETF to use? Should free trades trump expense ratios in making such selections? Here are a few things to consider when sorting through your ETF options:

Let purpose trump cost. The purpose an ETF serves in your asset allocation is more important than splitting hairs on cost. For instance, many of our MarketRiders portfolios concentrate on small-cap value stocks in a portfolio, even though these ETFs tend to have higher expense ratios. It is better to embrace the slight fee increase to achieve your desired asset allocation targets than to skip on the proper allocations in search of lower fees.

Understand the key areas of cost. Another important step in analyzing the value of commission-free ETFs is to understand the three main sources of ETF costs.

• Trading commissions. Most of the leading discount brokers charge around $8 to $10 a trade. If you have a globally diversified retirement account consisting of 14 ETFs and rebalance that account four times a year, you are making 56 trades. At $10 per trade, you are adding an annual $560 fee drag on your portfolio’s growth. For larger portfolios, these trading fees become less meaningful, but with smaller portfolios these fees can become significant. For example $560 in trading fees on a $500K portfolio represents less than .11 percent annually. On a portfolio of $50K, this annual burden dramatically increases to 1.12 percent.

• Fund expenses. While ETFs are run by sophisticated computers and have attractively low fund expense ratios, not all ETFs are created equal. When you look at the common indexes for U.S. large-cap stocks as supplied by the leading ETF providers, the fees vary slightly. Vanguard’s S&P 500 ETF (symbol VOO) costs 0.06 percent, while Schwab’s U.S. Large-Cap ETF (SCHX) costs 0.08 percent, State Street Bank’s SPDR S&P 500 (SPY) costs 0.09 percent, iShares S&P 500 Index (IVV) costs 0.09 percent, and now FocusShares Morningstar Large Cap ETF (FLG) costs 0.05 percent. A $100,000 investment in SPY versus FLG will differ a mere $40 annually because of their expense ratios. This is probably not a big reason to choose one ETF over another. The fund expense-ratio story can change, however, when you move into more specialized indexes. Take the emerging market index, for instance. While Vanguard offers MSCI Emerging Markets ETF (VWO) at 0.22 percent, Schwab offers its Emerging Markets Equity ETF (SCHE) at 0.25 percent, State Street offers SPDR S&P Emerging Markets (GMM) at 0.59 percent, and iShares offers MSCI Emerging Markets Index (EEM) at a whopping 0.69 percent. It is not surprising VWO just trumped the long standing emerging market leader, EEM, in assets under management, with an expense ratio differential of 0.46 percent and a great history of tracking the same index with excellence.

• Bid/ask spreads. While trading costs and expense ratios are easy for investors to understand, they often overlook a third cost: the bid/ask spread. The “ask” is the market price at which an ETF can be purchased and the “bid” is the market price at which an ETF can be sold. The bid/ask discussion can quickly become highly technical, but what investors need to know is that ETFs with lower volumes tend to have larger spreads, which essentially becomes another type of transaction cost. An ETF can trade for free, but because the ETF has poor volume, or weak market maker competition, the bid/ask spread can cost as much as the trading expense on larger transactions.

So what is the answer? Is it better to construct your retirement portfolio with commission-free ETFs offered at your broker, or to choose ETFs with the lowest expense ratios, or look at volumes and bid/ask spreads? Even with the three variables above, the answer becomes a very personal one that requires a bit of thought. How often will you trade? How much money is in your portfolio? Who’s your broker?

But with investing, arguably the most competitive and highest stakes game on
earth, few understand the stats. Many who have accumulated sizeable nesteggs from a lifetime of work understand the RBIs and batting averages of their favorite baseball hero better than how their money manager is performing.

The most important element contributing to investment performance is risk. You just can’t evaluate performance without the context of risk. Many investment advisors sell returns, not “risk adjusted” returns. They’ll tell you about their favorite manager who “killed it,” but you’ll never hear that he did so by taking risks that could have led to your losing all of your money.

Evaluating performance without measuring the amount of risk taken is like looking
at a golf score without adjusting for a handicap. The most sophisticated endowments
and family offices rigorously monitor “risk adjusted” performance. They hire the best
money managers and monitor levels of risk. They understand how a manager achieved
his results as much as the results themselves.

If your strategy is to actively manage your portfolio, then measuring risk is a vital,
complex, expensive and time-consuming pursuit. How many fund-of-funds invested in Madoff after extensive due-diligence and were blindsided by the risks they had taken?

Conversely, with MarketRiders passive strategy using ETFs, risk is simple to measure. In return for giving up the prospect of outperforming the market you lower risk, pay lower fees and statistically, “outperform” most who are paying for performance. In a MarketRiders portfolio you’ll never find hidden leverage, quant algorithms predicting market moves, quirky money managers, conflicts of interest or managers placing large bets with your money.

We measure performance by how efficiently our portfolios deliver returns given the
level of risk you were willing to assume (read our methodology section). You will get near exact returns for the amount of risk you are willing to take. In 2008, our low risk portfolios were up because they contained mostly bonds, and our portfolios with large equity allocations were down. The reverse was true in 2009. As we say, it’s about as exciting as watching paint dry.

Whether a simple language blunder or insight into the psychology of the rich and powerful, Svanberg’s comments touch on a belief held by many – that in this world there are rules for the privileged and then rules for the rest of us little people, conjuring up memories of the late Leona Helmsley’s famous statement that, “only the little people pay taxes”.

Wall Street is founded on the little people premise. One manifestation is seen in the ubiquitous conversation by wealth managers about AUM or Assets Under Management. AUM is the measuring rod of their success and compensation -a topic of their urbane, cocktail-party banter. Every wealth manager or investment adviser is aware of his AUM as well as that of their friends and competitors because it indicates how much one earns.

Wealth managers trim 1% to 1.5% in fees off of “their” AUM every year. The bigger your retirement account, the more you add to your manager’s AUM and you become a “bigger person” in his eyes. If your account is under $500K, you are likely a little person. Some top managers won’t even answer you’re call if you can’t add $5 million to their AUM.

While AUM is the accepted business model, we have a huge problem with it. What value does a wealth manager add that gives him the right to extract a fixed percent every year off the spoils of your life’s work?

We deliver our advice to all for the same low cost regardless of a portfolio’s size. We treat every investor as a big person. There are no special investors who are on the inside track with access to special insights or favors.

At MarketRiders, we’ve begun measuring our success, in part, by AOM, or Assets Out of Management. We track the amount of draining fees from the AUM game that we’ve helped you escape. This week, we celebrate reaching $500 million of AOM and you — our thousands of investors that are now saving millions in fees. Here’s to no little people!

Similarly with such market volatility in recent weeks, a few MarketRiders members have been asked to make some tough calls when, depending upon the portfolio, our rebalancing algorithms have alerted them to add to positions like, of all things, Europe. “Are you serious?” one member moaned. “Everyone knows Europe is blowing up. Why buy more now?”

Just like the man from the quote above, this member was having a tough time sticking with the plan. Sorry, but “buy low sell high” is tough to do. Successful investors must continually bet against the crowd, always with deep conviction, coupled with a tug of “unbelief.”

The MarketRiders system of buy, hold, rebalance is an investment approach, based upon solid research and unshakable facts. We can never remove all doubt, but we’ve harnessed the most scientifically verifiable investment approach known today. Rebalancing adds to returns and helps manage risk. You maintain your target allocations, and the risk level you set for yourself when you built your portfolio. Riding winners if fun, but what goes up, certainly comes down. Moving from religion to the casino: rebalancing forces you to “take money off the table” and add to losing bets that will be tomorrow’s winning ones.

It’s tough to maintain your allocations, and trimming a gold position or buying Europe while it is apparently swirling down the toilet is not easy. At moments like these, lean into the facts of the scientific research, push back your emotions and then rebalance your portfolio. You will be glad you did.

But after 50 years old, we start waking up at night worrying, “Will I ever be able to stop working one day?”  Taking action without the benefit of 20-30 years of time on your side is like swearing off steaks as you’re being wheeled into the operating room for a triple bypass:  too little, too late.

Since April 15th was the deadline for making yearly IRA contribution, the finance writers were dolling out plenty of advice and ideas on retirement. Neil Weinberg of Forbes guides us how to figure out one’s asset allocation in his article Asset Allocation -The Key to Building A Big Nest Egg.  His advice is very useful and his guidelines are similar to how MarketRiders online portfolio manager software works.  Other articles worth reading are found in the Wall Street Journal and the Washington Post, they both feature articles on ways to figure out how much you’ll need to retire.

Saving is the first step.  Smart investing is the second.  A recent MarketRiders study on how fees can devastate an IRA portfolio has been generating a lot of interest.  The study reviews three scenarios showing how a 35 year old can diligently contribute $4000 per year to his IRA, but end up losing $1 – $1.5 million over 40 years, just because of fees.

After you read this week’s articles, please fund your IRA this year.  You’ll be glad you did!