Wall Street has experienced a revolution in the investment industry. Services such as Wealthfront, Betterment and Vanguard’s Personal Advisor in the U.S. have shifted to providing investment advice online. These so-called robo-advisors assess an investor’s appetite for risk and match it with a diversified portfolio of exchange traded funds (ETFs), and a large part of the portfolio management is handled by algorithms.
The increasing popularity of robo-advisors leads A.T. Kearney to expect assets under management of these firms to reach $2 trillion by the end of 2020 in the U.S. This figure represents a market share of 5.6 percent, up from just 0.5 percent today. It is also likely that consumers will experience a rapid evolution of these platforms as technology will continue to push the intelligence of automated advice and algorithms to the next level.
The robo-advisory landscape in Europe is still in its infancy compared with the market in the U.S.
Nutmeg and Swanest in the UK, vaamo in Germany, TrueWealth in Switzerland, MoneyFarm in Italy and Marie Quantier in France are setting the stage. The winner is the consumer, profiting from decreasing prices, greater access to investment advice, smarter services and a lot more transparency.
Common among all these ventures is their endorsement of ETFs, which they use to build diversified investment portfolios.
The Robo-Advisors’ Preferred Choice
ETFs are a smart investment choice, but not only because of their low-cost approach to market exposure. Their beauty also lies in their simplicity and transparency. Active fund managers often struggle to define exactly where their client’s money is invested, as positions in a fund can change on a daily basis. Even worse are fund of funds, blurring the holdings even more.
As ETFs track a benchmark index, it becomes very easy for an investor to identify his/her holdings. If someone acquires an ETF that tracks the FTSE 100 index, the investor will simply be holding the 100 largest companies in the UK.
ETFs not only enable investors to access mainstream markets like the FTSE 100 and the Nikkei 225, they also offer an entire universe of possibilities: access to single countries, industries and commodities are made possible through the bundling of stocks, bonds and futures in the form of ETFs.
Furthermore, ETFs are traded on the stock exchange: anyone with an online brokerage account can enjoy access.