The Best Robo Advisor … For You

September 26, 2014

Bond Basics

For any young person, equity will be the main driver of portfolio returns. But as he ages, my teen will need to think about bonds. That's why I'm analyzing the 60/40 portfolios, after all.

Global bond benchmarks are not necessarily the right foil for U.S. investors concerned with capital preservation.

Instead, we measure bond risk in absolute terms: duration, or interest-rate risk, and then credit risk. Credit risk measures the likelihood of getting the cash flows you expect—interest payments and the return of your coupon. Interest-rate risk measures the future value of those cash flows. Also, the tax situation gets complicated, forcing apples-to-oranges comparisons between municipal bonds and taxable bonds.

The table below summarizes duration and credit risk, and also shows which portfolios contain muni bonds.

  Wealthfront Betterment FutureAdvisor Covestor WiseBanyan Invessence
Effective Duration 6.7 6.8 4.2 5.5 6.9 8.4
Weighted Average Credit Rating AA- BBB A+ A+ A BB
Allocates to Municipal Bonds Yes Yes No No No Yes

Not everyone needs muni bonds, so I'll discuss each group separately.

Among the firms offering muni bonds, Wealthfront has the least risky bond portfolio, sporting the lowest duration and the highest credit quality. It's also the only one of the three to use munis exclusively; Betterment adds a sliver of U.S. corporates and a slug of international bonds, while Invessence includes junk bonds. Invessence is the most diversified of the bunch in terms of fixed income, with allocations to emerging market bonds, corporates and preferreds rounding out the portfolio.

Of the firms with taxable-only portfolios, FutureAdvisor takes the least risk, while WiseBanyan takes the most. FutureAdvisor is the most diverse of the three, adding TIPS and global bonds to the U.S. Aggregate.

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