Robots Leave Money On The Table

September 04, 2014

We can’t justify the cost of holding our No. 1 choice, the SSgA suite, even though it’s the only one of the bunch to offer both small-cap and Canadian exposure. SSgA’s pair’s annual holding cost of 0.97 percent is higher than Canada’s combined maximum 10-year historic opportunity cost of 0.31 percent.

Worse, the SPDR S&P World ex-US fund (GWL | B-96), the one with Canadian stocks, is the more costly of the two, with an annual median tracking difference of -1.17 percent. We’d be better off avoiding the SSgA funds and adding iShares MSCI Canada ETF (EWC | A-92) to our global equity suite.

Our second choice, the BlackRock “Core” suite, works much better.

From its inception through July 30, 2014, IEFA actually outperformed its underlying index by a median 0.18 percent/year, no doubt because of fortunate optimization and aggressive securities lending. But even if IEFA were to revert to expectations and trail its index by the amount of its expense ratio, we would be willing to pay the minuscule cost differential between the BlackRock core suite and the Schwab or Vanguard funds, in order to access the small-caps.

The BlackRock Core suite, IEFA and IEMG, are the clear choice. We get access to the full market spectrum across the globe, except for Canada. We also have excellent cost control.


So why did five out of the six robo advisors choose the Vanguard suite, the one without exposure to Canada or non-U.S. small-caps? When I asked the robo CEOs and CIOs, “How do you select ETFs?” they all began their answer with “the expense ratio.” Many added other factors, and Betterment even made sure I spoke directly to the analysts who designed their TACO (total annualized cost of ownership) model.

It’s telling that none of them had an actual metric for portfolio breadth, or the opportunity cost that arises from portfolio gaps.

Let’s look at what they measure, and at’s corresponding data:

  Wealthfront Betterment Future Advisor Covestor WiseBanyan Invessence
Expense Ratio
Daily Volumes    
Portfolio Breadth  
Tracking Error    
Portfolio Turnover        
Assets Under Management      
Client-Friendly Securities Lending      
Market Impact        
Commissions on Custodian's Platform          

Data: Robo Investment Firms, summer 2014


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