A New Motif for Index Funds

With the prospect of interest rate hikes still dubious, it’s no surprise that many investors have turned to the stock market in pursuit of higher yields. The market’s larger returns is met with larger risks, and individual investors often have a hard time of reaching index returns.

One Silicon Valley startup called Motif Investing is determined to even the odds for small investors, or at least provide more convenience for individuals looking to take a position in the market. By creating an online account with Motif, individuals can buy into specialized index funds comprised of thirty electronically traded funds (ETFs). This is the equivalent of buying index funds from other similar online stock brokering services, with the added catch that each index fund is especially bundled to be by a particular market trend. In other words, Motif’s funds are purposefully designed to be undiversified, making them more risky but also increasing their potential yields. Furthermore, in order to help facilitate investment, Motif charges a flat ten-dollar commission for each fund, no matter how much of the index fund an investor buys, thereby significantly reducing transaction costs.

Each Motif, or index fund, comes with a unique label and assortment of stocks. For example, the stocks in Social Networking and Shale Oil are created by Motif’s own employees, and are comprised of exactly what their names suggest. With these stocks already prepackaged, individuals no longer have to worry about researching the specific companies they want to invest in – they can invest solely based on market trends.

Furthermore, Motif goes beyond what an average investor might do by offering highly specific positions and hedges. With such names such as Rest in Peace (comprised of hospice funeral-service stocks) and Caffeine Fix (made up of coffee company stocks), there are numerous niche Motifs offered by the company. Also, users can create their own Motifs for other users to invest in and receive a one dollar commission for every other user that invests in it. What this means is that the company can offer hundreds of motifs to suit almost any desired market position or hedge even the most specific risk. This also provides a unique advantage to investors who have knowledge in a specific field.

While Motif puts a shiny new face on trend trading, many skeptics still question whether it’s a beneficial service.  The concern boils down to this: average individual investors have little specialized market knowledge and will likely lose money to institutional investors with superior information. There’s also the matter of basis risk – there’s no way every stock can move in perfect unison in response to market shocks. Furthermore, Motif’s crowdsourcing of market insights may not result in any informational advantage unless the service gains many users with specialized market knowledge.

While these are all relevant issues, Motif’s target user base is active investors who are ready to take on these risks. Unlike other highly diversified index funds, Motif does not offer a safe and steady return. Rather, they offer investment opportunities and greater convenience for people who wish to take bets on the market and control their own portfolio returns. It’s made for those with an appetite for risk and specialized knowledge about market trends. With $126 million in venture capital funding, it’s clear that Motif has discovered a market niche for informed investors. The convenience and reduced transaction costs that Motif offers could bring thousands of individuals one step closer to being competitive in the stock market.