Inside Robo Advisor Asset Allocation

Inside Robo Advisor Asset Allocation

The humans behind the robo advisors seem to be tilting away from the market.

Director of Research
Reviewed by: Elisabeth Kashner
Edited by: Elisabeth Kashner

The humans behind the robo advisors seem to be tilting away from the market.


This is the third 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?” and the second was titled ”Ghosts In The Robo Advisor Machine”.


“`I wonder what makes us build inefficiently shaped human robots instead of nice streamlined machines.’

`Pride, sir,’ said the robot.”

—Terry Pratchett (“The Dark Side of the Sun”)

The humans behind the robo advisors have reason to be proud of their work. They build broad-based portfolios for a range of risk levels and offer them at low-cost, often with rebalancing and tax-loss harvesting.

But are these portfolios truly streamlined, or are they a touch humanoid?

As I mentioned in my previous blog, robo portfolios reflect the philosophies of their human creators. As part of my due diligence for investing my son’s bar mitzvah money, I did a deep dive into each one, to see how these philosophies came to life.

Good news: These guys pretty much practice what they preach, though a few who promised downside protection are are a bit light on its delivery. Some are evangelical, following strong convictions, while others use a lighter touch.

The resulting portfolios offer plenty of choice. All take bets, but in very different ways. Let’s dig in, and see what our choices are.

Robo-Portfolio Tilts

In the tables below, the black type shows the weights from a 60 percent equity-40 percent fixed-income/commodities allocation, while the blue type shows the weights from a 90 percent equity version. The first table assesses risk; the second shows notable portfolio exposures.

Robo-Portfolios Risk Vs. Benchmarks

 Equity WeightEquity Risk Vs. VTFixed Income Risk Vs. AGG
Future Advisor60%HighLow
Invessence60%LowVery high
90%LowVery high

Robo-Portfolio Exposure Highlights

 Equity EmphasisEquity Sector Over/UnderweightsFixed-Income EmphasisOther
WealthfrontUS EquitiesUnderweight financialsLong-dated MunisBroad-based commodities
Emerging Markets Long-dated MunisGold
BettermentValue Long-dated Munis, International bonds 
ValueUnderweight technologyLong-dated Munis, International bonds 
Future AdvisorEmerging Markets
Small Cap & Value
Overweight REITsShort-dated TIPS, International bonds 
Emerging markets
Small Cap & Value
Overweight REITsShort-dated TIPS, International bonds 
CovestorUS Equities, Emerging Markets,
Small Cap & Value
Overweight REITsLong-dated TIPSBroad-based commodities
Emerging Markets
Small Cap & Value
Overweight REITsLong-dated TIPSGold
WiseBanyanUS Large Caps, GrowthOverweight REITsLong-dated Corporates, International Bonds 
US Large caps Long-dated Corporates, International Bonds 
InvessenceUS EquitiesOverweight TechnologyLong-dated Munis, High YieldGold, Cash
US EquitiesOverweight TechnologyLong-dated Munis, High YieldCash

Robo Advisor Equity Portfolios


I scaled the robo advisors’ equity and fixed-income portfolios to 100 percent, as if each were an independent portfolio. Then I compared them with a single benchmark ETF: the Vanguard Total World Stock (VT│ B-100) for equities and the iShares Core US Aggregate Bond (AGG | A-97) for bonds.

With the help of’s Analytics tool, I was able to roll up statistics from each of the component ETFs to find the portfolio characteristics for each of the six robo-advisor portfolio pairs. I’ve included the full results in an appendix, for those who are up for a deep dive.

For the rest of us, here’s a top-line rundown of the robo-portfolio bets and balancing acts, compared with each firm’s stated goals. We’ll go robo-firm by robo-firm, looking at overweights; size and style tilts; sector bets; and interest-rate and credit risks. Maybe one or two of them will suit you—or my 13-year-old son, who has a small pile of bar mitzvah money, a job as a Little League umpire and a lifetime of earnings potential.


Weallthfront’s current portfolios overweight emerging markets at the expense of developed-ex-U.S. equities, expressing their investment committee’s current views. Their taxable accounts take on significant interest rate and credit risk in munis, while retirement accounts go heavily into REITs. And there are major differences between their moderate portfolios and their risky ones.

Wealthfront’s 60 percent equities allocation emphasizes the U.S. and, by extension, large-caps; while the 90 percent version tilts small, because of its 31-plus percent emerging market allocation (scaled, as above). In both cases, the allocation to the Vanguard Dividend Appreciation (VIG │A-56) pushes weighted average market-cap weights up, and increases the U.S. representation. Note that Wealthfront’s Chief Investment Officer Burt Malkiel employs VIG as a fixed-income substitute.

Wealthfront (and Betterment) trade control over portfolio duration, yields or credit risk for the tax-free status and tradability of broad-based U.S. municipal bond ETFs. Malkiel believes today’s muni yields are generous, because municipal defaults in Detroit and Puerto Rico have spooked the market.



Betterment has come through on its pledge to deliver marketlike exposure with a value orientation. But its promised small-cap tilt and downside protection are not in evidence. Like Wealthfront, Betterment takes on moderately high duration and credit risk from its muni bonds.

Betterment pulls off the trick of being both marketlike and value-oriented while not tilting small by making value allocations with U.S. equities only. U.S. large-cap value funds emphasize mega-caps, so Betterment’s value tilt increases its portfolio-weighted average market cap.

If, in the future, Betterment ventures into international value funds, as Chief Executive Officer Jon Stein suggested they might if expense ratios fall, its portfolio-weighted average market cap would likely rise further, approaching the global-weighted average, since mega-cap firms dominate value funds globally.

FutureAdvisor And Covestor: Balancing High-Risk Equity Positions Against Lower-Risk Fixed Income

FutureAdvisor delivers on its promise of a clear small-cap and value tilt, with potential inflation hedging in both REITs and TIPS. In fact, FutureAdvisor leads the pack in small-cap slants, because of its allocations to non-U.S. small-caps and REITs, shaving 23 percent off its weighted average market cap compared with VT. It leads in value, too; at least by the price/book ratio.

FutureAdvisor’s REITs allocation pushes around 35 percent of its equity weight to financials. Simon Moore, the firm’s CIO, explained that this isn’t a specific sector bet, but the effect of results of the value and small-cap tilts in combination with REIT exposure. Whatever the origin, FutureAdvisor’s small-cap and sector bets add risk to its equity portfolio.

In fixed income, FutureAdvisor shortens its overall portfolio duration and raises its credit quality in relation to its core aggregate U.S. investment-grade fund. It keeps its TIPS duration short, counterbalancing the long duration in its international bonds. FutureAdvisor’s clients will be well positioned for increases in the Consumer Price Index, but will give up yield while they wait. 


Covestor promises inflation protection, which it delivers—potentially—via REITs and TIPS. It also promises downside hedging, but instead takes on a good bit of risk in its equity portfolios by overweighting emerging markets. Its 60 percent equity portfolio has both a strong U.S. overweight and the highest emerging market exposure of the robo bunch. Meanwhile, its 90 percent equity portfolio ranks second highest in emerging market allocations. Those who believe in the long-term stability of the U.S. could interpret the U.S. equity overweight as downside protection.

In fixed income, Covestor extends the duration of our benchmark AGG by using long-dated TIPS, taking on interest-rate risk while reducing portfolio credit risk.


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.




Data sources: Wealthfront, Betterment, FutureAdvisor, Covestor, WiseBanyan, Invessence (various dates) and, July 1, 2014

Robo Advisor Equity Portfolios

TickerEquity Fund NameWealthfrontBettermentFuture AdvisorCovestorWiseBanyanInvessence
VTIVanguard Total Stock Market30.0%35.0%11.6%16.2%9.6%14.1%33.2%34.9%36.0%54.0%  
VEAVanguard FTSE Developed Markets13.0%22.0%24.7%37.5%5.6%8.3%12.7%19.5%19.5%29.3%  
VWOVanguard FTSE Emerging Markets9.0%28.0%5.2%10.5%11.6%17.0%14.9%21.0%4.5%6.8%8.7%15.7%
VEUVanguard FTSE All-World ex-US          2.9%4.6%
SPYSPDR S&P 500          37.2%54.4%
VBVanguard Small-Cap    4.8%7.0%      
IWMiShares Russell 2000          10.1%17.5%
VTVVanguard Value  11.6%16.2%9.6%14.1%      
VOEVanguard Mid-Cap Value  3.7%5.2%        
VBRVanguard Small-Cap Value  3.2%4.5%        
EFViShares MSCI EAFE Value    6.0%8.8%      
VSSVanguard FTSE All-World ex-US Small Cap    3.8%5.5%      
VNQVanguard REIT    4.5%6.6%5.1%5.0%8.0%2.0%  
VNQIVanguard Global ex-U.S. Real Estate    4.5%6.6%      
VIGVanguard Dividend Appreciation7.0%5.0%          
Total Equity weight59.0%90.0%60.0%90.1%60.0%88.0%65.8%80.5%68.0%92.1%58.9%92.2%


Not all the equity weights add up to exactly 60 percent or 90 percent—intentionally. FutureAdvisor’s 88 percent portfolio is the riskiest it offers. Covestor offers only three portfolios; we’re looking at its “balanced” and “growth” portfolios. WiseBanyan’s weights do indeed sum to 60 and 90 without the REITs, which they consider a nonequity asset class.



Size & Style Analysis

 WealthfrontBettermentFuture AdvisorCovestorWiseBanyanInvessenceVT
Avg. Market Cap ($B)85.674.576.074.361.061.175.472.478.385.287.983.679.0
Large Cap75.1%71.9%70.8%70.6%59.1%59.3%69.9%69.9%71.3%74.4%70.4%67.9%71.3%
Small Cap4.0%4.1%3.8%3.8%11.9%11.8%5.3%4.9%5.1%4.1%12.5%13.9%6.9%
Micro Cap0.6%0.5%0.3%0.3%1.4%1.4%0.6%0.5%0.7%0.7%2.2%2.5%0.7%
Dividend Yield2.0%2.1%2.1%2.1%2.3%2.3%2.2%2.2%2.1%2.0%1.8%1.8%2.0%
P/E Ratio19.217.818.618.419.119.119.819.122.020.420.820.920.2
P/B Ratio2.

Geographic Breakdown

 WealthfrontBettermentFuture AdvisorCovestorWiseBanyanInvessenceVT
Developed Ex-US25%31%43%44%35%35%24%30%30%33%7%8%44%


Note: considers South Korea to be a developed market.



Sector Breakdown

 WealthfrontBettermentFuture AdvisorCovestorWiseBanyanInvessenceVT
Basic Materials5.2%6.7%6.0%6.5%5.7%5.8%5.2%6.0%4.4%6.0%4.4%4.6%6.0%
Consumer Cyclicals12.3%11.2%11.6%11.3%8.9%8.9%11.1%10.8%11.6%10.8%12.0%11.8%12.6%
Consumer Non-Cyclicals10.7%9.6%9.4%9.4%7.0%6.9%8.3%8.4%8.2%8.4%8.5%8.4%9.1%


Robo-Advisor Fixed-Income And Commodity Portfolios

TickerBond & Commodity Fund NameWealthfrontBettermentFuture AdvisorCovestorWiseBanyanInvessence
AGGiShares Core U.S. Aggregate Bond      24.2%9.4%    
SCHZSchwab U.S. Aggregate Bond    11.0%3.3%      
MUBiShares National AMT-Free Muni Bond35.0%5.0%23.5%5.5%        
MLNMarket Vectors Long Municipal          18.1% 
ITMMarket Vectors Intermediate Municipal          1.8% 
SHMSPDR Nuveen Barclays Short Term Municipal Bond          1.8% 
LQDiShares iBoxx $ Investment Grade Corporate Bond  2.3%0.6%    14.0%3.5%  
VCLTVanguard Long-Term Corporate Bond          1.8%1.5%
JNKSPDR Barclays High Yield Bond          7.6%1.6%
PFFiShares U.S. Preferred Stock          1.8%1.9%
VGITVanguard Intermediate-Term Government Bond        10.0%2.5%  
SHYiShares 1-3 Year Treasury Bond           0.3%
IEFiShares 7-10 Year Treasury Bond           0.3%
TLTiShares 20+ Year Treasury Bond           0.4%
TIPiShares TIPS Bond      4.4%4.4%8.0%2.0%  
VTIPVanguard Short-Term Inflation-Protected Securities    18.0%5.4%      
BNDXVanguard Total International Bond  9.0%2.4%11.0%3.3%      
VWOBVanguard Emerging Markets Government Bond  5.2%1.6%        
EMLCMarket Vectors Emerging Markets Local Currency Bond         1.8%0.8%
DJPiPath Dow Jones-UBS Commodity Total Return ETN6.0%     5.0%     
IAUiShares Gold Trust 5.0%     5.0%  4.6% 
Cash       0.5%0.7%  2.1%1.0%
Total Weight41.0%10.0%40.0%10.1%40.0%12.0%34.2%19.6%32.0%8.0%41.1%7.8%

Duration, Yields And Credit-Spread Durations

 WealthfrontBettermentFuture AdvisorCovestorWiseBanyanInvessenceAGG
Effective Duration6.
Credit-Spread Duration6.


At the time this article was written, the author held no positions in the securities mentioned. Contact Elisabeth Kashner, CFA, at [email protected].


Elisabeth Kashner is FactSet's director of ETF research. She is responsible for the methodology powering FactSet's Analytics system, providing leadership in data quality, investment analysis and ETF classification. Kashner also serves as co-head of the San Francisco chapter of Women in ETFs.