According to MSCI, emerging markets represent 10 percent of the world's overall market cap, but your Wealthfront portfolios allocate 18 percent of stocks to emerging markets. Why the deviation from market cap?

It’s not a deviation from the market cap portfolio. EM is about – and this is float adjusted – 17 percent of the world market cap. And in fact, to the extent that today institutional investors as a group hold about 4 percent of their portfolio in EM, it’s a reflection of the home country bias. Wealthfront is closer to market cap weighting, which is actually completely consistent with an indexing view.

Also, the Shiller P/E is about 26 in the U.S., which is well above average. It’s about nine for emerging markets, which is well below average. It’s also the case that emerging markets are the cheapest markets in the world.

That sounds like a value strategy.

We use portfolio theory to put together a whole portfolio, and what you need to do is put expected returns into the Markowitz equation. One of the ways that we try to put the expected returns in is looking at things like the Shiller P/E ratios.

Many investors worry about what low interest rates mean for expected bond returns. Are they right to worry and what if anything should they do about it?

I’m a big indexer and in general I would believe in bond market indexing. But there’s one problem I feel with the bond market index in the U.S. Since the government now guarantees all the mortgage bonds, if you look at a U.S. bond market index fund, it’s about two-thirds government securities.

For better or worse, the central banks in the U.S. and all over the world have embarked on a policy of pushing interest rates down. It’s an era of financial repression, and I worry a lot about the bond market. If interest rates rise, I think people are going to be in for a lot of trouble in the bond market.

What we do at Wealthfront is use more corporates rather than governments because the corporate spread is about where it’s been historically. And we even use an “equity substitution strategy” where we’ll take a small piece of that “safer” part of the portfolio and put it into stocks like AT&T that have a 5 percent dividend yield, and where the dividend has been growing over time.

So I think what this era of financial repression means for investors is the old easy way of doing it – of just buying an index fund – may not work as well as it has in the past.