ETrade aims to hold costs down by keeping 20 percent to 50 percent of the portfolios in cheaper index funds and using cheaper institutional shares of mutual funds. Customers who choose the hybrid active/passive strategy end up paying fund expense ratios of 0.2 percent to 0.45 percent a year.
Even those who choose the less expensive ETF-only portfolio may be better off with the element of active management that ETrade's robo-advisor incorporates, Messina said. “There are certain asset classes where active makes sense,” he said. A manager’s expertise can come in handy in emerging markets or bond markets, he said, while certain market conditions may be better for active management than others.
How does Messina decide which fund managers to choose and when to use them? Experience helps, he said. Each member of the investment committee has at least 15 year years in the industry.
“Some of it is your gut," he added.