Betterment has come through on its pledge to deliver marketlike exposure with a value orientation. But its promised small-cap tilt and downside protection are not in evidence. Like Wealthfront, Betterment takes on moderately high duration and credit risk from its muni bonds.
Betterment pulls off the trick of being both marketlike and value-oriented while not tilting small by making value allocations with U.S. equities only. U.S. large-cap value funds emphasize mega-caps, so Betterment’s value tilt increases its portfolio-weighted average market cap.
If, in the future, Betterment ventures into international value funds, as Chief Executive Officer Jon Stein suggested they might if expense ratios fall, its portfolio-weighted average market cap would likely rise further, approaching the global-weighted average, since mega-cap firms dominate value funds globally.
FutureAdvisor And Covestor: Balancing High-Risk Equity Positions Against Lower-Risk Fixed Income
FutureAdvisor delivers on its promise of a clear small-cap and value tilt, with potential inflation hedging in both REITs and TIPS. In fact, FutureAdvisor leads the pack in small-cap slants, because of its allocations to non-U.S. small-caps and REITs, shaving 23 percent off its weighted average market cap compared with VT. It leads in value, too; at least by the price/book ratio.
FutureAdvisor’s REITs allocation pushes around 35 percent of its equity weight to financials. Simon Moore, the firm’s CIO, explained that this isn’t a specific sector bet, but the effect of results of the value and small-cap tilts in combination with REIT exposure. Whatever the origin, FutureAdvisor’s small-cap and sector bets add risk to its equity portfolio.
In fixed income, FutureAdvisor shortens its overall portfolio duration and raises its credit quality in relation to its core aggregate U.S. investment-grade fund. It keeps its TIPS duration short, counterbalancing the long duration in its international bonds. FutureAdvisor’s clients will be well positioned for increases in the Consumer Price Index, but will give up yield while they wait.
Covestor promises inflation protection, which it delivers—potentially—via REITs and TIPS. It also promises downside hedging, but instead takes on a good bit of risk in its equity portfolios by overweighting emerging markets. Its 60 percent equity portfolio has both a strong U.S. overweight and the highest emerging market exposure of the robo bunch. Meanwhile, its 90 percent equity portfolio ranks second highest in emerging market allocations. Those who believe in the long-term stability of the U.S. could interpret the U.S. equity overweight as downside protection.
In fixed income, Covestor extends the duration of our benchmark AGG by using long-dated TIPS, taking on interest-rate risk while reducing portfolio credit risk.