Robo-advisors rely on algorithms to allocate portfolios, seemingly taking humans out of the equation entirely, the Wall Street Journal writes. But it’s still people selecting the composition of those portfolios, according to the publication.
Different from the Indexes — and Each Other
To prove the point, the Wall Street Journal took a deeper look at robos offered by Vanguard, Betterment, Wealthfront and Schwab. What the publication found were some significant variations in how these seemingly automated platforms differ from the makeup of actual global markets.
Vanguard’s Personal Advisor Services, for example, invests in domestic and foreign stocks and bonds, the Wall Street Journal writes. But while 60% the $80 trillion invested in bonds around the world is in foreign bonds, Vanguard only uses them for 30% of its allocation to debt, according to the publication. Likewise, while international equities represent about half of the $60 trillion worldwide market, Vanguard only allocates 40% of its equity stake to foreign stocks, the Wall Street Journal writes.
Disparities between the worldwide allocation and the robos’ exist across the all four of the largest robo-advisors, the publication found. While Betterment is almost identical to the global markets in its allocations to foreign equities, it invests only about 45% into international debt, according to the Wall Street Journal. Wealthfront allocates 38% of its bond allocation to foreign debt, meanwhile, which is close enough, but it has 13% of its assets in real estate investment trusts, compared to 3.5% in the global market, according to the publication. And Schwab comes close to the worldwide allocation to foreign equities, investing 44% of its stock allocation into them, but is the only robo out of four that puts 5% of its portfolios toward commodities and 12% into cash, the Wall Street Journal writes. So while all four tout low-cost indexing as their overarching strategy, the differences can be substantial, according to the publication.
