If you have been following this show for a while, you’ll know that we’re huge fans (for most investors) of Canada’s Robo Advisors.
We love their low fees, ease of use, automatic rebalancing, indexing investment approach – and, did we mention how easy it was yet?
What we haven’t had enough data to comment on up to this point, was their overall investment performance. Now, I would argue that you shouldn’t be all that worried about performance numbers as robo advisors are generally pretty young, and consequently their track records are not really indicative of true long-term results. If you’re investing for the long term (7+ years) then performance over the last 12 months should NOT be anywhere close to the determining factor that you use when choosing your investments.
Instead, what should put you at ease, is the fact that all of these robo advisors invest with broad index ETFs, and subscribe to index investing philosophies to varying degrees. This means that over the long term, you are basically betting on the combined market averages of companies and bonds from around the world. Historically, that has been a pretty good bet – much better than trying to pick your own stocks, or paying someone to pick stocks for you (i.e. mutual funds).
Now, this is not a comparison of DIY ETF index investing and robo advisors. Obviously if you scroll down you can see exactly what ETFs robo advisors invest in, and then you could open a discount brokerage account and try to copy their overall strategy for a lower MER (fees). That said, you would then be responsible for paying discount brokerage fees and doing the legwork when it came to rebalancing, etc. If you want to know which way of index investing is the best for you – I recommend scanning down to the mid-way point of this article.
Active Stock Picking vs Passive Management with Robo Advisors
What we’re trying to do here is show evidence that ultimately, whether you’re picking your own stocks/ETFs or paying someone else to do it for you through a mutual fund, you’re almost assuredly going to lose investment returns (aka cash in your pocket) if you aren’t using a more passive investing model.
Robo advisors are not robots! What they do is automatically allocate your money across a huge variety of assets around the world. As those asset values go up and down, robo advisors will re-balance your portfolio to make sure that your overall risk level stays where you want it to be, and that you automatically buy low and sell high on overall asset groups to some degree. They don’t go with “gut instinct”. They don’t “have a hot stock tip” to sell you. They aren’t riding around in private jets and using your fees to buy yachts like mutual fund managers are. Instead, it is an automatic, pre-designed, pre-agreed-to algorithm that simply rebalances your portfolio like clockwork, day after day (if needed).
Traditional mutual fund salespeople/financial advisers who make their money by selling you commissioned products with terribly high fees, will try to scare you with lines like, “Why let a robot manage your money, who even knows what ETFs are? They’re all new and scary, not traditional and safe like us”. These guys didn’t get to $1.4-trillion+ in assets under management by being stupid. They know that Canadians LOVE terms like traditional and safe. Traditional and safe could be the Canadian financial motto. The fact is that ETFs have been around for decades now. There are 24 ETF providers in Canada that manage $130-billion in assets, and trillions more around the world. Robo advisors are just taking these basic low-fee index investing vehicles, and creating ready-made portfolios with several of them.
If they can’t scare you, the next step for many commissioned salespeople (who get paid primarily by convincing you to choose mutual funds) is to make a claim that usually goes something like this, “Sure, index ETFs and robo advisors are ok if you want to be average, but personally, I like to be well above average. That’s why I invest in this elite all star fund that makes WAY better returns than those mediocre index guys.” That’s fake news folks! To prove it, here is a little apples-to-apples research that was recently done.
Modern Advisor’s Core 7 vs The Field
ModernAdvisor recently looked at their actual investment performance versus some of their mutual fund competition. These are no longer hypothetical numbers, but mathematical fact.
When comparing investments and whole portfolios, one has to be careful to make sure the comparison is accurate and similar in terms of types of investments and overall risk taken. For example, you can’t compare a group of Canadian government bonds, to junk bonds from Thailand, or Canadian stocks to stocks from India, South Africa, and Brazil. Apples need to be compared to apples!
So, in the spirit of full disclosure, ModernAdvisor recently put out an article that compared their “Core Risk Level 7 Portfolio” (aka “Balanced Portfolio) – which is made up of roughly 62% stocks and 38% bonds, to other “60//40 balanced” funds from some of Canada’s largest institutions. Before you scroll to the results, it might be useful to take a look at exactly what is in the Core Risk Level 7 Portfolio…
Here is what your portfolio would look like if you put $1,000 into it.
- iShares Core S&P/TSX Capped Composite ETF (XIC) Canadian Stocks $161
- Vanguard US Total Market ETF (VUS) US Stocks $107
- Vanguard Developed ex-US ETF (VEF) International Stocks $153
- Vanguard FTSE Emerging Markets All Cap Index ETF (VEE) Emerging Market Stocks $108
- Vanguard Canadian Short-term Bond ETF (VSB) Canadian Bonds $267
- BMO Emerging Market Bond ETF (ZEF) Emerging Market Bonds $113
- Vanguard FTSE Canadian Capped REIT ETF (VRE) Canadian Real Estate $91
As you can see, this asset mix includes broad indexes from all over the world, a Canadian real estate index (a bit heavier weighting than my personal tastes, but to each their own) and 38% of the portfolio is in bond indexes.
Here’s how they’ve stacked up over the last couple of years:
|As of September 30, 2017||12 Month Return||Return Since January 2016*||Total Return||Volatility (Standard Deviation) since January 2016*||Sharpe Ratio|
|ModernAdvisor Core 7||7.3%||8.5%||15.4%||4.1%||1.93|
|TD Comfort Balanced Portfolio – Investor||1.7%||4.2%||7.5%||4.1%||0.88|
|RBC Select Balanced Portfolio Series A||5.0%||5.5%||9.8%||5.6%||0.89|
|CIBC Managed Balanced Portfolio||3.0%||3.7%||6.6%||4.9%||0.65|
|BMO SelectTrust Balanced Portfolio A||4.8%||4.2%||7.4%||5.6%||0.65|
|Scotia Canadian Balanced||6.0%||7.4%||13.4%||4.7%||1.47|
|Mawer Balanced Fund Class A||4.3%||5.0%||8.9%||5.7%||0.78|
|CI Cambridge Asset Allocation Corporate Class||2.1%||4.1%||7.2%||4.3%||0.82|
|Fidelity Monthly Income Series B||0.5%||4.4%||7.9%||3.2%||1.21|
|Tangerine Balanced Portfolio||4.5%||5.1%||9.0%||5.4%||0.83|
As you can see from the above table, with a very comparable risk level and standard volatility, ModernAdvisor’s basic index & rebalance strategy has trounced the active managers. Some of this can be chalked up to the fee differences, while much of it is also just the simple fact that the passive strategy has outperformed the active one.
Now, this is not to say that ModernAdvisor’s index-esque strategy – or those of similar robo advisors – will continue to outperform all comparable mutual funds over every quarter or every single year. But this comparison should serve to give you a few arrows in your quiver to fire back with when a mutual fund salesperson/financial adviser tries to tell you that their “5-star fund” is magical and will beat any indexing or automatic rebalancing strategy. These talking points are again, just fake news, despite how popular they seem to be.
Non-industry studies have repeatedly shown that if everything else is equal, asset allocation and fees are the two most important areas for retail investors (small fries like most of us with less than millions in investable assets) to think about. Picking stocks and trying to “beat the market” is simply not a ballpark most of us should be playing in. Consequently, it’s no surprise to me that a basic diversify + index strategy has outperformed actively-managed competition in the short term, as they are virtually guaranteed to do so in the long term.
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