Prudential, Axos Invest, and Acorns Lead YTD
Amongst our taxable robos, Prudential, Axos Invest (formerly WiseBanyan), and Acorns are the top performers YTD for performance above/below the Normalized Benchmark. All three portfolios have above-average allocations to domestic stocks, which have outperformed international equities consistently over the past three years. Axos Invest has emerged as a long-term performance leader, proving that a simple portfolio can achieve strong long-term performance. Axos’s domestic equity allocation relies almost entirely on the Vanguard Total Stock Market ETF, and their fixed income consists of high-yield and investment-grade corporate bonds.
This quarter we introduced the Schwab Intelligent Portfolios option, which tilts towards domestic securities. It has notably outperformed our other taxable Schwab portfolio with a larger international allocation and placed 6th for the quarter.
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Fidelity Go and Axos Invest Leading Long Term Performance
Over a longer time period, Fidelity Go has solidified its place as a top performer, taking the top spot for overall returns in both the two- and three-year time frames. Fidelity holds a majority of its equities in a single S&P 500 index fund and has a lower-than-average allocation to international equities. This has benefited them due to the relatively strong performance of domestic large-cap stocks. Axos Invest placed second over the two- and three-year periods for total portfolio performance. It also had the second-highest equity performance over the two-year period and the third-highest fixed-income performance over the two- and three-year trailing periods.
Schwab, Personal Capital, and Betterment have continued to underperform in the two- and three-year time frames. Schwab and Betterment allocate more than 40% of their equity holdings to international stocks, causing them to miss out on stronger growth at home. Additionally, Schwab and Betterment are among those portfolios with a value tilt; value stocks have underperformed growth stocks in recent years. Personal Capital’s higher-than-average fee and sector-specific ETF strategy have contributed to its underperformance.
Titan Invest, introduced to the report this quarter, significantly underperformed. Its strategy is to follow the moves of hedge funds and holds individual equities. Three of its selections—Netflix, Twilio, and PTC Inc.— fell 27%, 26%, and 14%, respectively, when Titan held them this quarter. This lead Titan’s performance into the negative for the third quarter.
Diversity Drives Fixed Income
Schwab has held onto the top-performing three-year fixed income spot in this report. Schwab has a more diverse fixed-income portfolio than many of its peers. It holds a mix of municipal, high-yield, TIPS, and international bonds. Ally achieved the top two-year fixed-income performance spot with a longer-than-average maturity across their bond portfolio and holdings of corporates. E*Trade placed second for fixed income in the two- and three-year time frames, holding only two fixed-income funds—an intermediate-term corporate bond fund and an ETF that tracks the Barclays Aggregate Bond Index.
SRI Extends Trend of Outperformance
Another quarter of performance for our SRI portfolios reveals that a majority of SRI portfolios have continued to outperform their peers. Over the third quarter and YTD, five of eight SRI portfolios outperformed the portfolio at the same provider. However, our TD Ameritrade SRI portfolio experienced a series of poorly executed tax-loss harvesting trades that left the portfolio highly allocated to cash in January of this year, dragging down performance. These trades were unrelated to the portfolio’s SRI theme. Most notably, the Wealthsimple and Morgan Stanley SRI portfolios outperformed their non-themed peers by over 2% in the one-year trailing period. In Morgan Stanley’s case, the outperformance was driven in part by a much lower international allocation in its SRI portfolio.
Given the specialized nature of SRI funds, they tend to have higher expense ratios. Thus, these funds must perform better to provide investors with the same after-fee returns. One year is a short time period over which to judge long-term trends, but strong returns over that period are a positive sign for this investing trend. If investors can see that they are not losing out on performance by paying for environmental, social, and governance factors when investing, they will be more likely to support the SRI movement.