Robots Leave Money On The Table

September 04, 2014 schools the robo advisors on ETF selection.

This is the fifth blog in a multiple-blog series by’s Director of Research Elisabeth Kashner on the new “robo advisory” industry. The first was titled "Which Robo Advisor For My Teen?”;  the second was titled "Ghosts In The Robo Advisor Machine”; the third was titled "Inside Robo Advisor Asset Allocation”; and the fourth was titled "Rebooting Robo Advisors’ ETF Selection”.


In my last blog, I called out the robo advisors—all of them—for choosing the wrong ETFs.

They picked low expense ratio funds, sacrificing coverage or tax efficiency for a few extra basis points. Before I recommend any of these firms as managers of my son’s bar mitzvah money, I’d like to see them improve their ETF selection game.

Today I invite you to play robo chief investment officer for a day. We’ll take all the puzzle pieces and see if we can put them together sensibly. And I do mean all the pieces: opportunity costs, holding costs and trading costs, in that order, which is from highest to lowest impact for a long-term buy-and-hold investor.

Our puzzle picture is a map of the world. We’ll be selecting funds that get us closest to our goal of covering every stock in every country on the map.

To make sure we’re working from the same box, we’ll follow the robo CIO’s requirements to choose three funds, one each covering the U.S., developed-markets ex-U.S., and emerging markets. We’ll have to work with the available pieces; namely, existing broad-based, cap-weighted ETFs.

The U.S. fund is easy. and all the robo advisors agree that VTI is the best option. The non-U.S. funds are more difficult.

We have to pick the two non-U.S. funds as a pair, to avoid gaps or overlaps with South Korea. The non-U.S. puzzle pieces are arrayed in the table below, in order of inclusiveness:

Issuer Developed Ex-US Options Emerging Market Options Includes Canada Small Caps S. Korea Treatment
SSgA GWL GMM Yes Yes Developed
BlackRock (core) IEFA IEMG No Yes Emerging
Schwab SCHF SCHE Yes No Developed
BlackRock (legacy) EFA EEM No No Emerging
Vanguard VEA VWO No No Developed


Now, let’s get down to business.


Find your next ETF

Reset All