Robo Advisor Upside/Downside Capture Ratios

  • TD Ameritrade, Wells Fargo, and Axos captured more upside than downside
  • Our Wealthsimple suite impressed with downside reduction
  • Decisions in fixed income drive risk mitigation

In this article, we took a closer look at the upside and downside capture of our robo accounts over the trailing two-year period. Upside/downside captures are compared to an average return of the robo portfolios for the period. The overall trend is clear: most of the robo portfolios capture a proportionate amount of upside and downside. The upside/downside of the portfolios also highly correlates to the percent of equities in the portfolios, with the portfolios that contain a higher percentage of equities showing both higher upside and downside capture ratios.

TD Ameritrade stands out as one of the few portfolios that is capturing more of the upside than the downside. TD relies heavily on a large-cap fund for its equity allocation. Domestic large caps have been one of the best performing areas of the market over the past two years. Additionally, the portfolio invests in a Barclays Aggregate Bond Index-tracking fund, which holds all investment- grade issues and relies heavily on treasuries. Both areas of the market have provided protections during the downturn. 

Wells Fargo and Axos Invest also showed higher upside participation than downside participation. Wells Fargo holds a series of smart-beta funds on the equity side that may have helped them capture more upside than downside. Axos Invest has been one of the most active traders, executing both TLH trades and regularly executing rebalancing trades during the tumultuous previous months. With these rebalancing trades,  Axos sold fixed income and purchased equities as markets fell. This may have contributed to the portfolio’s ability to capture more of the up than down market.

The Wealthsimple and Wealthsimple SRI portfolios both graph at the bottom end of the upside and downside chart. The Wealthsimple portfolio achieved the lowest downside capture while maintaining a nearly 60% equity allocation. Two factors drove these results. First, Wealthsimple now owns significant allocations to minimum volatility funds, which should damper both the upside and downside of the portfolio. The second factor is that Wealthsimple’s fixed income is long in duration and high in quality. These holdings performed well during the recent volatility, limiting the impact of that dramatic fall in equity markets.

Generally, results underscore the difficulty of portfolios to capture more upside than down side in the markets. Most robo portfolios are designed to be well-diversified and low cost, not to provide significant outperformance or asymmetric returns in up and down markets. We would not expect standard portfolios at most providers to effectively capture asymmetric upside and downside capture ratios.