How to Create a Motif?
Most investors are often used to the concept of passive investing as it is quite simple and doesn't require too much of the investor's time. One of the best examples of passive investing is index funds where investors can hold indirectly the portfolio of securities tracking the broader market.
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Passive investing can be called a buy and hold approach and doesn't require too much on the part of the investor as far as the day-to-day activities are concerned. Given that there is little to no interference in such approach to trading, the returns are also somewhat conservative.
Within passive investing, investors have the choice to pick and choose from a number of different types of funds via an exchange traded fund or an ETF. The benefit of ETF is that it allows investors to purchase shares in the fund rather than individually buy shares in each of the stocks that the ETF tracks.
While passive investing is simple, there are also some shortcomings. For example, the returns one can expect is greatly limited to the type of funds or ETF that the investor picks.
For example, if an investor bought a few shares in the SPDR S&P500 ETF trust which tracks the 500 odd companies listed on the S&P500 index, investors are limiting their investments to the benchmark stock index alone.
Similarly, even if you opted for a gold backed ETF or gold miners ETF, there is a certain amount of limitation that comes with it. While this is perfectly normal if you want to take a very targeted approach to investing, for the general investing community having more choice in the ETF that they want to invest in can help.
Now imagine, if investors had the flexibility to create their ETFs minus the huge costs and the simplicity to create a motif just once and invest in it? Motif investing is all about giving the investor this flexibility and choice.
What is motif investing?
Motif investing is relatively new to the investing community and is part of the fintech wave that has been sweeping the financial industry. Motif investing takes active investing to a whole new level by combining the power of basket trading.
With motif investing, investors are offered more choice when it comes to building their investment portfolio. In a way, motif investing is similar to a do-it-yourself (DIY) ETF as it loosely resembles that.
With the investor being given the choice to build their own motif or basket of stocks and ETFs to trade, motif investing has become quickly popular as the only thing limiting the investor in motif investing is their imagination.
With motif investing, investors can create laser-targeted motifs that one wouldn't find in the ETF world. For example, you could create a motif that is based on tracking stocks dealing with only semi-conductors, or create and invest in a motif that has ETFs that tracks select international markets and so on.
It is not surprising therefore that within just a few years of its inception, motif investing has become quite popular.
The only catch with motif investing is that it is applicable for active investors, at least as far as creating the motifs are concerned. However, once that is done, investors can then make their motifs public where other investors can also invest in.
Thus, in a way motif investing can be both active and passive investing.
Technically speaking, motif investing is defined as a financial product called a "motif" which allows investors to select up to 30 stocks and/or ETFs. This motif then starts to behave like an ETF and investors can simply invest in the motif, which automatically allocates the funds according to the stocks in the motif.
In terms of commissions or other fees, investors have to pay a flat commission of just $9.95 per motif and a fee of $4.95 for adding additional stocks to the motif that was already purchased.
Motif investing offers a lot of benefits in terms of reducing the fees when it comes to investing. While common knowledge dictates that the more changes one makes to their motif holdings the fees can quickly add up, for investors who are well prepared, motif investing can be kept cheap in terms of the brokerage fees involved.
Creating a motif – Things to remember
One of the reasons that attracts investors to create their own motifs or to invest in an existing motif is that unlike ETFs or mutual funds there are no fees involves such as the expense ratio or the fund management fee typical to ETFs and mutual funds.
The ability to create your own investment pool one of the major reasons why savvy investors are drawn to motif investing. Indeed, you can create a market beating motif with the right knowledge and picking the right combination of stocks or ETFs.
Creating a motif is very simple. Of course, you need to have an account with Motif Investing first. The minimum deposit of just $250 is required to open an account and to start trading and $2000 is required if you want to trade on margin.
Once your trading account is set up, creating a motif is easy and most of all free of cost. You only pay when you buy or sell or rebalance your motif.
There are a few things to bear in mind when creating a motif.
- You can have 30 stocks or ETFs per motif
- Creating a motif is free of cost
- There is flat fee of $9.95 when you buy, sell or rebalance your motif
- You can add additional stocks or ETFs for a cost of $4.95 per stock or ETF
- You can create up to 250 motifs
- Investors have the option to either share their motif or to keep it private
Creating your first motif in three simple steps
The following steps show how you can build your very first motif. Remember that you can create up to 250 motifs, free of cost. You only pay when you buy the motif. This is a cost effective way to trade.
For example if you created a motif with 30 stocks, it costs you just $9.95 to invest in the motif, which is a lot cheaper compared to purchasing 30 stocks individually.
For beginners it is best to invest in an existing motif as it takes the guesswork out of the equation and also you have some historical performance data to fall back upon. Only after investors gain some experience and exposure will they be able to start focusing on building their own motifs.
Step 1: Build a Motif
Once your account has been created, the first step is to go to your dashboard and click on ‘Build a Motif’ as shown in the image below. You don’t need to fund your account at this stage, so this is fairly easy.
From here, you can click on Build a motif and proceed to the next step, which is to Create a Motif. You also have the option to explore existing motifs as well or trade stocks or ETFs directly.
Step 2: Create a Motif
Here, you can give your new Motif a name and also put in some description. While the name is mandatory, you can skip adding the description or adding an image to your motif (as long as it is a private motif for your use only).
If you have any intentions of making your Motif public, the image and description are essential. Also remember that once you give a name to your motif you will not be able to change it at a later stage, especially if it is public.
When you make your motif public, it becomes open to discussions and other investors can leave their opinions. Therefore, if you are not comfortable with being critiqued it is best to keep your motif private.
In the above picture you can see a sample Motif being created. The performance graph on the right side is just a placeholder graph which is updated once you start adding stocks or ETFs to your motif, which brings us to the next step.
Step 3: Adding Stocks or ETFs to your motif
In the next step, you can add stocks or ETFs to your motif. There are two ways to go about doing this. In the first option you can add the stocks individually. This option is ideal if you have already done your research and have a ready list of stocks that you want to add.
The second option is to search for stocks by investment ideas. You can enter the theme such as airline stocks, or mining stocks or financials and so on and you will be presented with a big list of stocks and ETFs that you want to add to your motif.
The above picture shows you a sample search done using the keywords investment, financials, brokerage and banking.
You can then go through the list and ‘uncheck’ the stocks that you don’t want until you reach the limit of 30. Remember that a motif can have no more than 30 stocks or ETFs but you can have fewer holdings in your motif if you want to.
If you wish to add new stocks or ETFs to your motif, then you pay an additional $4.95. Therefore it is best to select the stocks before hand while creating your motif.
You can also make some adjustments in the weightage by selecting from a drop down from the Weighting strategy. Using the drop down, you can select from the following choices:
- Equal Distribution (All stocks or ETFs in the motifs have an equal distribution)
- Market Cap (The stocks and ETFs are weighed by the market cap. So stocks with higher market cap get assigned higher weightage)
- Custom (You can set your own custom weightage)
- Relevance (Stocks with highest relevance for the keyword and is applicable only when you have more than one keyword for an investment theme)
- Mixed (Applicable when you add stocks or ETFs directly rather than searching via keyword or theme)
Remember than weightage plays an important role within the motif as it assigns the weightage to each of the stocks or ETFs selected.
While the weightage strategy of market cap, equal distribution and relevance are straightforward to understand, the custom weightage strategy allows for more flexibility for the investor.
The above picture shows the motif weightage strategy based on the custom settings. Here you can assign your own custom weightage to each of the stocks or ETFs in the motif.
As mentioned earlier, the stock weightage is an important factor as it can affect the overall performance of the motif. However you can check how well the motif would have performed historically by looking at the performance chart shown earlier.
Investors should however be reminded that past performance is no guarantee of future returns. Before publishing you can also check on the motif parameters such as the dividend yield, returns and so on.
Once you have updated the motif you assigned the weightage, you can then proceed to save or publish your motif.
After you publish your motif you won’t be able to view the historical data as the motif is live and you can now track it in real time.
How to invest in a motif that is already created?
If you want to invest in another motif that is publicly available, you can click on explore motifs options and run a detailed search including category, returns, theme and so on. You also get to see some of the most trending motifs.
Investors can now choose to either directly buy the motif or to customize the motif. For this second option you need to select the ‘Customize Motif’ option from where you can add and delete the stocks that are listed.
What are the drawbacks of motif investing?
Motif investing might seem exciting the first time you hear about it, especially terms such as themed investing and so on. Secondly, motif investing is relatively cheaper as you can trade up to 30 stocks for just $9.95.
However, motif investing has some drawbacks that investor need to be aware of. For starters, motif is often closely compared to an ETF. Thus it is best to start with the drawback that with motif investing, dividends cannot be automatically reinvested.
Therefore, investors need to manually reinvest the dividends. This manual reinvestment comes with an additional fee of $9.95. Furthermore, when you are customizing an existing motif, or customizing your own there is a fee of $4.95.
The concept of creating your own motif can be quite tempting, but investors should remember that not all motifs can perform well and selecting the right combination of stocks and ETFs and assigning the right weightage is a skill in itself.
While investors can get carried away with the flexibility of creating their own themed version of an ETF the fact remains that you can quickly lose money with your motif if you end up picking the wrong basket of stocks or ETFs.
Despite the short comings, motif investing, as a financial technology disruptor has brought the concept of active investing to the general investing community. Investors who wanted the flexibility of creating their own portfolio of stocks are now able to create their own motifs and invest accordingly.
How to create a motif at minimal costs
Investors who jump into motif investing without a clue of how motif investing works and the fees associated with it can quickly set themselves up for higher brokerage fees and even worse, building a risky portfolio.
Therefore, before creating your motif, it is advisable to first come up with a short list of stocks. This should also include any fundamental analysis for the basket of stocks or ETFs as well as taking into consideration the aspect of weightage for the stocks listed as well.
Building a motif when you are well prepared with the list of stocks can help you to keep the costs to the bare minimum while maximizing your portfolio returns as well.
However, if you are stuck for ideas, start by looking investing in one of the existing motifs.
In conclusion, as with all financial products investors should be cautious and only take informed decisions when it comes to motif investing. Because of the flexibility to create your own themed investing idea, investors can easily get carried away without knowing the obvious mistakes they are making, until after they invest.
There is a reason why other investment products such as ETFs and mutual funds charge additional fees and it is for actively managing the pool of holdings in these funds. Therefore, investors should be very careful when designing their own motifs.
Having said that, motif investing is no doubt the next step in the evolution of financial investing and with the right knowledge, skills and mindset, investors can look at making significant returns with the flexibility provided by motif investing.