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How Motif Investments Works: Risks & Rewards

Author: Andrew Jackson

As robo-advisors like Betterment and Wealthfront shape alternative investment in the digital age, Motif Investing has emerged as yet another player in the space. Motif has developed unique financial products called motifs that are similar to the low-cost exchange-traded funds offered by the aforementioned startups. Exchange Traded Funds (ETFs) are securities that track an index, commodity or basket of assets, and trade like a stock. Loosely resembling existing ETFs, motifs offer wide-ranging, low-risk investments.

The Basics

Motif lets investors create or buy motifs featuring up to 30 stocks or ETFs following a specific theme. For example, the tablet motif contains a mix of semiconductor, hardware, memory and display stocks, such as NVIDIA (NVDA), Apple (AAPL) and SanDisk (SNDK). Investors can control the weight of stocks within a motif until they reach their desired portfolio.

To open an account, investors simply sign up online. A minimum deposit of $250 is required to make trades and $2000 to trade on margin. The company charges a flat commission of $9.95 per motif purchase. Investors may add stocks or ETFs to their already purchased motif for $4.95.

Recently, Motif introduced its new Horizon Models. These motifs replicate an online retirement fund similar to those offered by Betterment or Wealthfront and are commission-free. However, rather than using robo-allocation like those startups, Motif Investing chooses an asset allocation tailored to the consumer's time horizon and risk tolerance.

The Advantages

As robo-advisors and online investment strategies become more prevalent, their advantages do as well. Motif's clear advantage over other online brokerage houses is its minimal fees. Investors are subject to a one-time $9.95 commission when purchasing a motif. There are no additional management or hidden fees associated with Motif's service.

Furthermore, Motif actively rebalances portfolios for their premade motifs. Rebalancing is the process of setting the weight of each asset in a portfolio back to its original state through buying and selling. As one of the most innovative means of investing, consumers with little capital or those in search of secondary investments may find Motif's services advantageous.

The Disadvantages

Just like any financial investment, there are risks and disadvantages associated with using Motif. To gain lucrative returns, investors must be aware of trends prior to other investors and markets. Short-term investors who pick up trends late can find little to no returns on their investments.

In addition, dividends gained from stocks or ETFs are not subject to reinvestment. Motif pays out dividends as cash flow and reinvesting must be done manually. Manual reinvestment does incur another $9.95 transaction fee. Likewise, investors must pay a $4.95 trading fee when changing securities within a motif as well as capital gains tax for positive returns. While most brokerage houses charge transactions fees, these can add up quickly for active traders.

The Bottom Line

As Motif Investing continues to grow alongside robo-advisors, time will tell whether these innovative means of investing will stay. The fundamentals of Motif vastly differ from other services. Investors have the option to choose 30 stocks or ETFs relating to a specific theme or motif. Popular motifs have followed current trends – such as Recent IPOs, Biotechnology, and 3D Printing – and investors able to predict trends ahead of the market may see substantial returns. However, Motif is likely most beneficial for investors seeking a secondary portfolio or those with less money to invest.

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