The first quarter of 2020 was a volatile time for markets as they dealt with the impact of COVID-19. Backend Benchmarking tracks various subsets of robo-advice offerings to get a better picture of what firms offer. One such subset is active portfolios. We have active portfolios opened at E*Trade, Morgan Stanley, Betterment, TIAA, and Titan Invest. Titan is the only one of these that does not have a non-active counterpart. It must be noted that Betterment does not consider their portfolio to be a true active portfolio. Instead, they consider it “smart beta” by employing Goldman Sachs active beta funds.
Titan Stands Out
In the first quarter of 2020, the active portfolios performed better than the non-active portfolios at the same provider on average. Titan Invest, a 100% equity portfolio, was the top equity performer over the period, as well as the top performer when compared to the Normalized Benchmark. Its return of 6.53% over the benchmark is the highest we have ever witnessed. This performance is due toTitan purchasing a short S&P 500 ETF. Even though it was a small percentage of the portfolio, it provided much-needed protection against tumbling equity markets.
Active vs. Passive
Of the providers that we track with both active and passive portfolios, active portfolios had higher average returns relative to the Normalized Benchmark and for equity performance. TIAA was the only provider whose active portfolio did not outperform the passive over the first quarter. Over the quarter, our active portfolios had a return of -14.33%, on average, while the passive portfolios returned -14.82% on average. One factor driving this outperformance is that many of our active portfolios have a tilt towards growth stocks which outperformed value stocks over the period.
Management fees and account minimums of active portfolios remain the same, but the expenses on the underlying holdings typically increase. Expense ratios increased an average of 0.23% across our four active portfolios when compared to their passive peers. Morgan Stanley, TIAA, and Betterment all had more expensive funds in their active portfolios, increasing their weighted portfolio expense ratios. TIAA has the largest increase, with the weighted average expense ration jumping from 0.07% to 0.64% when opting for the active portfolio. E*Trade is the exception. Its active portfolio had a weighted average expense ratio of 0.08% versus 0.09% for the passive offering.
The active portfolios have performed better on average in the first quarter of 2020. Betterment’s Smart Beta portfolio had the greatest outperformance, returning 2.95% higher than its passive counterpart. Although this outperformance is largely due to a lesser allocation toward equity in the portfolio as a whole during a tough period for equities, a more apples-to-apples comparison of the equities in the two portfolios shows that the active portfolio’s equities outperformed those in the passive portfolio by 3.55%. Morgan Stanley’s active portfolio outperformed by 0.63% in the first quarter, driven largely by a heavier allocation to growth stocks. TIAA was the exception. Its passive portfolio returned 2.30% over the quarter.
Three of our active portfolios—TIAA, Morgan Stanley, and E*Trade— have been open for one year. Over that time period, the results are mixed. The passive portfolios outperformed by only 0.28%, on average, over the one-year trailing period ending March 31, 2020. Although the 1-year performance results are mixed, short-term outperformance of active portfolios suggests that their more hands-on approach may help when markets are faced with steep selloffs. As we collect more data and have our portfolios open longer, we hope to gain and share more insight.