Wealthfront’s wide constraints allow Malkiel’s enthusiasm for emerging markets a wide berth. Malkiel explained to me: “We believe ex-ante that emerging markets are likely to return more, on a risk-adjusted basis, than the U.S. market.”
To support his view, he cited a CAPE ratio of less than 15 for the emerging markets vs. 26 for the U.S.
Covestor reached a similar conclusion, by a different process: using the last 10 years of historical returns and volatility to generate future expectations. In addition, its wide constraints allow emerging markets to dominate the equity allocation.
At the other end of the spectrum, Betterment’s CEO Jon Stein told ETF.com: “The difference between a 10 percent and 12 percent emerging markets allocation doesn’t really matter. Diversification among asset classes—stocks and bonds—matters much more.” Betterment’s use of Black-Litterman pushes its weights closer to global market weightings.
Lastly, Wise Banyan’s tight constraints strictly limit its allocation to VWO.
Did you notice that every single robo advisor picked VWO, rather than the iShares Core MSCI Emerging Markets ETF (IEMG | B-99),the Schwab Emerging Markets Equity ETF (SCHE | B-89) or the iShares MSCI Emerging Markets ETF (EEM | B-99) for their emerging markets exposure? How did that happen?
In blogs four and five, I’ll examine each firm’s fund selection process.
The fourfold range of VWO weights between WiseBanyan and Wealthfront clearly shows that the constraints and philosophies do drive asset allocations. This can make an enormous difference in portfolio returns over the long run. For the 10 years through June 30, 2014, the MSCI Emerging Markets index returned 11.9 percent annually, while the Russell 3000 returned just 9.3 percent. Over 10 years, that adds up to a 66 percent disparity in returns.
Of course, there’s no knowing what the future holds. Malkiel could be right, or very wrong. But one thing’s for sure: Even for robots, it pays to do your homework. Stay tuned for the third blog in this series: a full-throttle assessment of each robo advisor’s risk levels and portfolio tilts.
Contact Elisabeth Kashner, CFA, at [email protected].