More and more investors are investigating robo asset managers, but where will they go to compare their performance to ETFs and other common investment vehicles. This series will document the performance of Betterment, Wealthfront and VTI, Vanguard's Total Stock Market ETF.
I have invested $10,090 in each of the above. During the next year, I will publish a quarterly comparison of my experience with these investments.
What is a robo asset manager and how does it work?
Robo asset managers generally claim to have a proven formula for investing success. They tailor a mix of investments, mostly ETFs, to your particular set of circumstances: age, marital status, and risk tolerance for example. They accept small accounts but incentivize members to go big. Now for some particulars about the investments that I chose:
The company offers three levels of service:
- Those who fund their accounts with less than $10,000 but who commit to at least $100/month auto-deposit join for .35% of their average annual balance. For this they get no trade fees, no transaction fees and no rebalancing fees.
- You can get a better deal if you start with at least $10,000, you will pay only .25% of your average annual balance. You will experience no trade fees, no transaction fees and no rebalancing fees. With a minimum $50k balance, you will also achieve the benefit of Tax Loss Harvesting+.
- Get your best deal with an account over $100,000:
- No Trade Fees
- No Transaction Fees
- No Rebalancing Fees
- Tax Harvesting+
- Personal Consultation
This is what Betterment's website says about their service:
Advice that's catered to you.
- Customized portfolio allocation.
- Automation and custom investing.
- Automated investments, with a human touch.
- Our process starts by giving advice based on time horizon and building you the right customized portfolio for each goal.
- Take the right level of risk - Our allocation advice to you is based on our glide path - a formula that factors in your investing timeline to determine the exact mix of assets in your portfolio.
- Manage all your goals from one account.
(Read more on the Betterment website.)
Everyone gets the first $10,000 managed fee-free. Above that you pay $0.25%. The minimum account size is $5,000.
These are the advantages that Wealthfront claims to provide:
- Truly automated - Wealthfront takes the guesswork out of sound, long-term investing through effortless automation. Wealthfront manages a personalized online investment account for you that is fully diversified and periodically rebalanced - accessible anytime and anywhere from your desktop, tablet or phone.
- The best index funds - Our service is premised on the consistent and overwhelming research that proves index funds significantly outperform an actively managed portfolio. We employ ETFs that track indexes for the 11 major asset classes used in our portfolios.
- Extremely low cost
The most tax efficient-
- No other automated investment service offers all five levels of tax minimization that are available with Wealthfront:
- Index Funds. Unlike actively managed mutual funds, index funds have very little turnover, which means you incur much lower capital gains taxes.
- Intelligent Dividend Reinvesting. Using dividends to rebalance your portfolio throughout the year minimizes sales, leading to lower realized capital gains.
- Tax location. All clients receive different asset classes and asset allocations for taxable and retirement accounts to optimize their after-tax performance.
- Daily Tax-Loss Harvesting. Clients with $100,000 or more invested in a taxable account can take advantage of our Daily Tax-Loss Harvesting service at no additional cost.
- Tax-Optimized Direct Indexing. Clients with $500,000 or more invested in a taxable account can take advantage of Tax-Optimized Direct Indexing, our portfolio that provides enhanced Tax-Loss Harvesting by harvesting losses among the individual stocks in the S&P 500.
- Daily Tax-Loss Harvesting and Tax-Optimized Direct Indexing could add more than 1.6% to your portfolio's annual after-tax return.
- Incredible software engineers
(Read more on Wealthfront the website.)
Vanguard's Total Stock Market ETF (NYSEARCA:VTI)
The reason for including VTI in an experiment that evaluates the performance of two robo asset managers is to offer a control entity. You not only want to compare one robot to another, you want to know how it compares to a broad index.
Here's what Vanguard says about VTI:
- Seeks to track the performance of the CRSP US Total Market Index.
- Large-, mid-, and small-cap equity diversified across growth and value styles.
- Employs a passively managed, index-sampling strategy.
- The fund remains fully invested.
- Low expenses minimize net tracking error.
(Read more on the Vanguard website.)
On January 23, I invested $10,090 in each of the three above-mentioned entities. The first month of each quarter I will write an article that documents the value of each one.
Disclosure: The author is long VTI.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.