Backend Benchmarking released its 18th edition of the Robo Report, covering the fourth quarter of 2020 and the 6th edition of the Robo Ranking.
Over the past five years, the average robo has returned 11.90% annually on its equity holdings and 4.38% annually on its fixed income. However, even robo advisors realize that performance is not enough, which is why they have incorporated live advisor options, banking features, and digital tools to help customers. The past five years have also shown us that robo advisors are not a monolith; there are real differences in portfolio construction that lead to disparate outcomes in returns. There are differences of over 2% to 3% annually in the returns for both equity and fixed-income performance among the best-performing and worst-performing portfolios.
San Francisco-based SigFig won the award for “Best Overall Robo” for the second ranking in a row. SoFi, driven by its performance, placed second and Fidelity Go placed third. Schwab, Personal Capital, Wealthfront, and Betterment were recognized for having the best digital platforms and top-notch digital planners, performance has held these providers back from being contenders. However, all four have received awards in the ranking for the qualitative categories where they shine. Vanguard placed first for “Best Robo for Complex Financial Planning Needs”.
SRI or ESG (environmental, social, governance) investing remains a hot trend in the investment industry
Over the course of the year, digital-advice platforms continued to expand their Socially Responsible Investing (SRI) options. Firms such as Ellevest, E*Trade, Morgan Stanley, Betterment, and Wealthsimple have long offered clients the option to choose an SRI-themed portfolio. One of the most surprising elements of this trend is its magnitude. For example, US SIF studies showed that SRI assets grew approximately 40% between 2016 and 2018.
Betterment shared that year-to-date SRI assets under management grew at six times the rate of assets in its traditional core portfolio. The trend is clear. Whether it is in new ETFs, robo offerings, or direct-indexing customization, the ability for clients to invest in a way that supports their values is rapidly expanding and will continue to do so.
Wealthsimple is also focusing on expanding its business through impact investing. In June, it launched two SRI ETFs on the Toronto Stock Exchange. While Wealthsimple already had an existing SRI-themed portfolio in 2016, it pushed further into the SRI investing industry by creating SRI ETFs.
Backend Benchmarking compared the equity performance of the SRI/ESG options and the standard options at the same robo advisor to analyze their differences. The M1 Finance SRI portfolio, which holds entirely ESG-themed ETFs, placed first over Q4 for total portfolio performance compared to the normalized benchmark. It was also fourth for equity-only performance over the quarter.
Backend Benchmarking also holds standard and SRI portfolios at the following eight providers: Betterment, E*Trade, Ellevest, Merrill Edge, Morgan Stanley, TD Ameritrade, TIAA, and Wealthsimple. When analyzing SRI portfolios, it is best to focus on the equity holdings, as many of the SRI-themed portfolios do not hold SRI-specific bond funds. Over the 2-year trailing period, the equity holdings in every SRI portfolio except E*Trade’s outperformed the standard counterpart at the same provider.
The widest margin of outperformance was at Wealthsimple, whose SRI portfolio saw its equity holdings outperform the standard option by over 7% annually. The reason for this is that the standard option has minimum volatility funds that have a value tilt while the SRI option is more neutral.
It is difficult to pinpoint exactly why SRI is outperforming. One factor is that SRI often excludes fossil fuel and many energy companies, which have lagged over the past two years, and has more exposure to technology companies that often fall under the SRI umbrella. Additionally, the equities in the SRI portfolios we track tend to be modestly tilted more towards growth than their standard counterpart.
Six of the SRI portfolios hold between 3% and 5% more growth equities than their counterparts. Growth has significantly outperformed value over both the 1-year and 2-year periods making even this slight tilt towards growth a component of recent outperformance. Over the 2-year trailing period, SRI portfolios are filling up the leaderboards. Wealthsimple SRI and Merrill Edge SRI placed first and second, respectively, for performance compared to the normalized benchmark. For equity-only performance, Morgan Stanley SRI placed first and Wealthsimple SRI placed second.