Exposure to international investments explained some of the divergence in returns. Digital advice platforms like FutureAdvisor, Schwab and Betterment kept more than 40 percent of their equity allocation in international stocks, while robos like Hedgeable, Acorns and E*Trade’s ETF service dedicate less than 30 percent of their equity allocations to international equities.
In past years, exposure to international securities hurt the relative performance of some roboadvisors, notes Schapiro, with many globally oriented digital platforms underperforming due to China’s slowing growth and one-off international events like 2016’s Brexit vote.
The outperformance of growth stocks relative to value stocks has also shaken up the roboadvisory world, according to the report, because many robo portfolio managers weight towards value to capture the historical outperformance of inexpensive stocks. Betterment, Schwab, FutureAdvisor, and to a lesser extent Ellevest and Merrill Edge were all negatively impacted by their preference for value investing, according to the report.
“There are no roboadvisors overweighted in growth-style investing,” says Schapiro. “At the same time, they’re varying in a wide degree in the risks they’re taking on the stock and the bond sides.”
The inclusion of alternatives and real estate within roboadvisor portfolios should have an impact on their performance, notes Schapiro, but few roboadvisors currently offer alternative exposures beyond an allocation to REITs.
While many roboadvisors use domestic REITs within their allocations or allocate to international REIT ETFs, only three hold gold assets: Personal Capital, Schwab and Hedgeable. Personal Capital is also the only roboadvisor in the study with commodity exposure, via a small allocation to an ETF.
Finally, the use of active fixed-income managers has helped some roboadvisors generate alpha for their users, in particular, E*Trade’s hybrid offering harnessed active management within two municipal bond funds, allowing it to outperform the E*Trade ETF strategy and its roboadvisor peers.
Schapiro says the results thus far have been measured over two to three years of a bull market, and thus additional services like tax-loss harvesting have little impact on the performance of roboadvisors over the study period. Investment trends are also difficult to distinguish over a short time period encompassing a bull market.
The idea, says Schapiro, is providing greater transparency to how roboadvisor algorithms work in different market environments. By tracking the real performance of roboadvisors, investors and human advisors can make comparisons and more informed decisions about where to allocate assets.
Roboadvisors comprise a diverse assortment of client prospecting, onboarding, account opening and asset allocation tools—not every roboadvisor contains the same functionalities, and not every platform uses the same automated and algorithmically guided processes. Some robos include cash flow management and savings tools, while others do not. Some roboadvisors are actually “hybrids” of digital platforms and traditional advisors or phone banks of financial professionals.