Build your own custom ETF - feedback?
Hi team,
I want to invest as diversified and cheaply as possible (so ETFs are a good idea) but exclude a number of companies that I want no part in because they are bad for the environment (big oil) or just bad businesses (airlines). There are a huge number of sector ETFs on the market but they often
- are not diversified enough
- include or exclude stocks that I would have excluded/included
- tend to be a bit more expensive (in terms of fees)
So I built a tool
- to pick a subset of the S&P500
- weigh the selection equally or based on market cap
- buy the selection via Alpaca (an API broker)
Minimum price Minimum investment is $1 per position, so if my ETF contains 20 positions, the minimum amount per trade is $20. It'll be higher if you choose market cap weighting and the companies are very different in size. This minimum investment is set by Alpaca.
[Edited to avoid any misunderstandings - this is not the pricing model. Trading is free, but the minimum amount per stock required by Alpaca is $1]
Usability
Does the way I structured the page make sense to you? Were you able to select the stocks you wanted to include?
Market size
I'm honestly a bit worried whether anyone would actually use it. I've built it for myself but I'm also a huge investment nerd and I know the code. So actually asking someone to commit serious money to a random trading website is a big ask (Alpaca itself is SEC registered etc., so the stocks are secure - my project doesn't touch money or stocks). How should I go about finding out how big the market actually is, before investing more time/money into actually launching it?
Pricing
Most (neo)brokers charge nothing per trade as they sell their order flow to market makers (a practice called payment for order flow or PFOF). So the customer expects to pay nothing - how much would you charge? Should it be a fixed sum or a (capped?) percentage of investment?
Link in case you missed it
I too play with these ideas, and did some research in 2020 how to do this in my local jurisdiction (DE).
The tldr is, that if I do this (build a tool, buy/sell via API) I don't need to worry about compliance if I am the only user. If I want to make money somehow, or act as a broker of some sort, I need the relevant registrations as a fintech before I ever make the first trade. Or else I run into the danger of serious fines and risks of lawsuits.
That's why most smaller tools only do stock screening and not stock brokerage. Be supercareful that you don't run into any legal issues with this!
Re the actual tool: I understood what it does, but only with your explanation. It's not self-explanatory, but then it's an early MVP, right? Your pricing model does not make sense to me, lots of other places I can trade more cheaply and more easily.
I'd suggest to look into a) building a screener instead and b) reconsidering if you really want to build ETFs (does that really solve the problem? what problem exactly?).
Usually traders already have their own "ETF" by having a mix of asset classes, ETF's, individual stocks etc. in their portfolio.
You're right, it's misleading what I wrote regarding minimum investments. $1 is the minimum investment per stock, as required by Alpaca. Trading itself is free. I've edited the section.
Yeah it's an early MVP that I built for myself. I posted it here and on Twitter to get some unbiased feedback which seems to confirm what I already thought was the case. All in all, I guess I'm at the same point you were some time ago: Highly regulated market (i.e. higher setup costs) AND no obvious sustainable pricing model (since trading is free on most apps) don't make for a good indie project.
Still sure that custom indexing will become more commonplace, though more likely as part of an already existing brokerage.
Also from Berlin btw ;)