Find Out How Robo-Advisors Diversify Your Investments

by: Barbara Friedberg

Summary

Robo-advisors are not all the same. The various platforms give investors a wide menu of investment asset choices.

From US and international stock ETFs to individual stocks, commodity indexes, gold and emerging markets bond ETFs, and more -- there are a range of financial assets available from the robo-advisors.

Don't sign up for a robo-advisor before understanding the company's available investment choices.

It all started several years ago when I met Invesco's early-stage robo-advisor, Jemstep. As a former portfolio manager who morphed from a value-oriented contrarian stock picker to a lazy passive index fund investor, I was intrigued. Could a digital investment platform carry out the careful index fund asset allocation that I work tirelessly to perfect? In order to find out, I took a spin on the Jemstep platform and found that after a quick risk tolerance questionnaire, the robo-advisor-suggested asset allocation was remarkably similar to the one that I had so carefully crafted.

Jemstep, now marketing directly to the financial advisory community, previously allowed investors to maintain their investments with their existing custodians. This legacy robo-advisor provided asset allocation recommendations for the investor to carry out on her own. Thus, my interest was piqued: Could a robo-advisor really provide all that a sophisticated investor needed?

The Robo-Advisor Diversification Conundrum

I continued to study the robo-advisors, their similarities and differences. Simultaneously, I wrote many articles about the industry for Investopedia. I was curious to discover if there was a robo-advisor that offered a platform diverse enough, with various asset classes, to meet the needs of the investor seeking a level of diversification that went beyond the traditional, U.S. and international stock ETFs and broad total bond market and government bond ETFs. What I found was a tremendous amount of distinction within the investment asset classes offered by the various ETFs.

Tony Ash, Seeking Alpha contributor, wrote about the divergence in asset allocation recommendations among the robo-advisors in "Are All Robos the Same?" He also touched upon the various number of asset classes offered by Betterment and Wealthfront. Ultimately, there's tremendous heterogeneity within the robo-advisory industry, as each digital investment advisor offers distinct asset classes and ETF selections.

While the decision about whether to invest with a robo-advisor is a personal one, it's useful for the investor to understand the vast diversification models within the broad automated investment advisor offerings.

When looking at the diversification of individual robo platforms, I discovered that although the majority of robo-advisors trade in exchange traded funds, there are a few that incorporate individual stocks as well. Additionally, several robo-advisors offer funds that recognize the well-researched market anomalies such as the long term outperformance of small caps and value stocks. A recent CFA blog article, "Generating Alpha by Exploiting Market Anomalies," by David Larrabee, CFA, claims that since 1926, US small cap stocks outperformed large caps by an average of 2.7% annually.

Ultimately, if you're searching for the diversification opportunities behind various robo-advisory platforms, take a look at how several companies diversify their clients' assets.

TradeKing Advisors Assets

TradeKing Advisors (TKA) takes the diversification lead with 17 funds included within their investment options. The availability of market-cap-related ETFs include a mid and small cap ETF that captures the market anomaly that small caps outperform larger cap stocks. TradeKing Advisors also nods to the value investor with a mid cap value and small cap value ETF. Other specialty TKA ETFs include several unique international funds, the iShares MSCI EAFE Small Cap (NYSEARCA:SCZ) ETF and the SPDR Dow Jones Global Real Estate (NYSEARCA:RWO) ETF. TKA tackles the bond asset class with high yield corporate and international emerging markets bond funds. Finally, this robo-advisor expands the traditional asset classes with a commodity index fund offering, iPath Dow Jones-AIG Commodity Idx TR (NYSEARCA:DJP) ETN.

TradeKing Advisors

Fund

Asset Type

Ticker

Stock Funds

Vanguard Total Market

US Stocks

VTI

Vanguard Value ETF

US Stocks

VTV

Vanguard Mid Cap ETF

US Stocks

VO

Vanguard Mid Cap Value ETF

US Stocks

VOE

Vanguard Small Cap ETF

US Stocks

VB

Vanguard Small Cap Value ETF

US Stocks

VBR

Vanguard Europe Pacific ETF

International Developed Stocks

VEA

iShares MSCI EAFE Small Cap ETF

International Developed Stocks

SCZ

Vanguard Emerging Markets Stock ETF

International Stocks

VWO

SPDR Dow Jones Global Real Estate ETF

REITs

RWO

Bond Funds

iShares JPMorgan USD Emerging Markets Bond ETF

International Bonds

EMB

Schwab U.S. TIPS ETF

US Bonds

SCHP

SPDR Barclays Capital High Yield Bond ETF

US Bonds

JNK

Vanguard Total Bond Market ETF

US Bonds

BND

Vanguard Short-Term Bond ETF

US Bonds

BSV

Other

iPath Dow Jones-AIG Commodity Idx TR ETN

Commodities

DJP

Cash Account

Cash

Click to enlarge
Personal Capital

Personal Capital is quite unique in both its offerings, holdings and diversification orientation. At first glance, the diversification for their stock allocation is in line with many others: U.S. stocks, developed market international stocks and emerging market stocks. Yet, their methods of capturing distinct asset classes is unlike the competition. Personal Capital buys individual stocks for their client portfolios instead of choosing from existing ETFs. The firm also subscribes to a tactical sector-weighted asset allocation instead of a market capitalization-weighted approach.

In the bond asset classes, Personal Capital includes the typical corporate and inflation-protected bonds. They also offer international bonds as do several other automated investment platforms.

Personal Capital deviates from the commonplace by offering an alternatives asset class that includes the following sectors:

  • Real Estate
  • Gold
  • International Real Estate
  • Energy
  • Food
  • Metals
Betterment

Betterment, a goals-based robo-advisor sticks to the more typical financial assets. The company recently launched a tax smart asset location option for their investors to accompany their internationally diversified investment options.

The Betterment investment choices span diversified U.S. stock and bond ETFs without any "alternative" asset classes. The stock asset choices include broadly diversified U.S., developed and emerging markets international funds. Seeking to exploit the value market anomaly, Betterment includes U.S. large, mid and small cap value ETFs.

Betterment offers broader diversification in the bond sector than many of its competitors with munis, Treasuries and corporate bonds along with several international bond funds. The international bond ETFs include both developed and emerging market international bond ETFs, a unique addition to the typical robo-advisory ETF offerings.

Betterment

Sector

Ticker

Stock Funds

U.S.

VTI

U. S. Large Cap Value

IVE, VTV

U.S. Mid Cap Value

IWS

U. S. Small Cap Value

VBR, IWN

Foreign-Developed Market

VEA, SCHIF

Foreign-Emerging Market

VWO, IEMG

Bond Funds

Short Term U.S. Treasuries

SHV

Inflation Protected U.S. Bonds

VTIP

U.S. High Quality Bonds (IRA accts.)

BND

U.S. Municipal Bonds (Taxable accts.)

MUB, NYF

U.S. Corporate Bonds

LQD

International Developed Market Bonds

BNDX

Foreign-Emerging Market Bonds

VWOB

Click to enlarge
Wealthfront

Wealthfront, another low-fee robo-advisor with a wide slate of ETF options differs somewhat from its competitors by adding sector real estate and natural resources ETFs. Their vanilla stock ETFs are flavored with a dividend appreciation ETF, unlike many of the company's peers. The Wealthfront bond diversification options include typical government, corporate and munis along with a foreign emerging market bond fund.

Wealthfront

Sector

Ticker

Stock Funds

U.S.

VTI and SCHB

Foreign-Developed Market

VEA and SCHF

Foreign-Emerging Market

VWO and IEMG

Dividend Appreciation

VIG and SCHD

Bond Funds

U.S. TIPs

SCHP and VTIP

U.S. Government Bonds

BND and BIV

Municipal Bonds

MUB and TFI

U.S. Corporate Bonds

LQD

Foreign-Emerging Market Bonds

EMB

Alternative Funds

Real Estate

VNQ and SCHH

Natural Resources

XLE and VDE

Click to enlarge

In the final analysis, although the robo-advisory landscape is frequently discussed as if it were uniform, it isn't. From various definitions of conservative, moderate and aggressive investors to opportunities for diversification, the robo-advisor field is diverse. Before turning your investing over to a digital algorithm, understand whether the robo-advisor's underlying individual investment choices are in line with your diversification preferences.

Disclosure: I am/we are long VTI, VBR, VWO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.