Inside Robo Advisor Asset Allocation

August 22, 2014

WiseBanyan And Invessence

WiseBanyan and Invessence take the opposite approach to FutureAdvisor and Covestor, balancing higher risk in each of their bond allocations against lower equity risk.

WiseBanyan’s U.S.-centric, large-cap equity tilt might compensate for its elevated interest-rate risk. By dropping the influence of the REITs at the higher risk level, WiseBanyan raises its allocation to large-caps as it moves from 60 percent to 90 percent equity. Ex-REITs, WiseBanyan’s U.S.-heavy portfolio pushes up its market caps, compared with the global market.

WiseBanyan takes on duration risk, but keeps credit risk on par with AGG. Both types of risk come primarily from iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD | A-68), though long-dated TIPS and U.S. government paper contribute to the interest-rate sensitivity.

Lastly, Invessence’s strong home-country equity bias shows the pitfalls of partial constraints. Its no-constraints-on-the-U.S.-equity-market philosophy pushes the U.S. to 80 percent of its equity portfolio, with 60 percent parked in the SPDR S&P 500 ETF (SPY | A-98) alone.

There’s a 500-stock hole between SPY and the other part of Invessence’s U.S. equity suite, the iShares Russell 2000 ETF (IWM │ A-79). The missing midcap stocks, along with a huge emphasis on the U.S. market, make Invessence’s portfolio rather top-heavy, with the highest-weighted average market caps of all the robo advisors.

Invessence has made good on its intention to cover the full yield curve and credit spectrum, delivering the most complexity, longest duration and greatest credit risk of the bunch. A primary allocation to long-term munis (duration 11.75) brings plenty of interest-rate risk, and a slug of high-yield bonds pumps up credit risk, bringing 4.44 percent yields.

Streamlined Or Humanoid?

And that’s it. Each of the six robo allocations makes some bets away from the broad market: Wealthfront’s 31 percent emerging market bet (in the 90 percent equity version); FutureAdvisor’s small-cap tilt; and Invessence’s extreme SPY allocation might deliver handsomely, but come with plenty of downside. Forewarned is forearmed.

Even though most of the robo advisors promote features such as rebalancing, tax-loss harvesting or zero cost, the risk levels and specific portfolio exposures will largely determine their returns. Investors are the real winners here, with a range of interesting choices. Streamliners might prefer sticking to VT and AGG, but those looking for human input will find it aplenty.


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