Archive by Author


Why The Best-Performing ETF Isn’t Always The Best Choice

We get a lot of questions about why we choose certain exchange-traded funds in our portfolios and not others. Often, readers of our blog will point out that this or that ETF has outperformed one of the ETFs we recommend for our portfolios. We love getting feedback, but in this case, our readers are failing to see the forest for the trees. Specifically, they’re evaluating things in isolation, when what matters is how a particular ETF works in a portfolio. Sports fans know this idea well. Teams will sign players with superstar statistics, only to see their overall team performance suffer, as the player doesn’t mesh well with others. Conversely, teams may add role players, only to see their team […]

Which Is More Important: Minimizing Taxes or Minimizing Fees?

Our goal at Wealthfront is to maximize your net-of-fees, after-tax returns. If you’re a regular reader of this blog, you’ll know that we say that phrase over and over again. Our chief investment officer, Burton Malkiel, is famous for pointing out that there are only three things you can control when investing – your costs, diversification and taxes – so we built our service around managing those things for our clients. The funny thing is, while we get a lot of credit for building strong portfolios and minimizing fees, the third thing – minimizing taxes – may actually be the most important of all. Our research shows that smart strategies to minimize taxes could enhance your net-of-fees, after-tax return by […]

How Often Should You Check Your Portfolio?

At Wealthfront, we’ve put an incredible amount of time and effort into making our web site and mobile applications informative and easy-to-use. Login to your Wealthfront account and you have a world of information at your fingertips. You can see your overall account value over time. You can view your overall portfolio returns and the returns of the individual ETFs that comprise your portfolios. You can see even where we harvested losses, and chart your projected returns over time. Our teams of designers, engineers and content creators have examined every detail to make the experience as seamless as possible. It is simple, beautiful, and information rich. Which is why it pains me to say this: You shouldn’t look. Despite all […]

How Does Direct Indexing Work?

At Wealthfront, we’re proud of our record of innovation. From tax-loss harvesting to dividend-based rebalancing, we believe our innovations have increased returns for thousands of Wealthfront investors by driving down costs, increasing diversification and reducing taxes. Of all our innovations, however, we’re especially proud of our Direct Indexing service. Introduced in 2013 for accounts over $500,000, and expanded to accounts with $100,000 in assets last year, we call it The Next Generation of Indexing. No other automated investment service offers anything like it. Our Direct Indexing program allows clients to track the returns of the U.S. equity market by directly owning individual securities instead of by buying an exchange-traded fund. Specifically, instead of buying the Vanguard Total Stock Market ETF […]

Why Do Automated Investment Service Portfolios Differ?

The rise of automated investment services like Wealthfront is redefining how people invest their money. The combination of strong academic financial research, software, and exchange-traded funds has allowed firms to offer optimally designed portfolios at extraordinarily low costs. But while most of the major automated investment services, including Wealthfront, base their portfolios on Modern Portfolio Theory (MPT), the portfolios that they create for people are very different. How could this be? As I explained in What Long-Term Return Should I Expect? (and in-depth in our investment methodology white paper), MPT is very sensitive to the inputs that go into it. Different estimates around the volatility, correlation and expected return of each asset class – the key inputs into an MPT […]

Smart Beta and Factor Timing

A new research paper from Denys Glushkov, Research Director at Wharton Research Data Services of the University of Pennsylvania is raising some eyebrows in the smart beta world. The paper is one of the most comprehensive independent looks at the performance of smart-beta ETFs, and the results are not pretty. Despite looking at 11 years of real data, the paper finds no evidence that smart beta ETFs have outperformed the market on a risk-adjusted basis. To be specific, the study looks at the performance of 164 domestic equity smart beta ETFs and comes up snake eyes. The result must come as a shock to the smart beta industry. To date, most of the “studies” on smart beta have been from […]

Software Based Companies Should Be Judged On Their Rate Of Innovation

Software is eating the world and it’s pretty clear why. Unlike their people-intensive predecessors, software-based businesses have the ability to improve their offerings at a rapid rate. But software is not a commodity, and not all companies are able to innovate at the same rate. Understanding that matters, because committing to a software-based vendor that is not the innovator in its space will likely lead a customer to incur significant costs in the form of lost opportunity – and that opportunity cost is usually quite tangible. Not All Automated Investment Services Innovate At The Same Rate Allow me to illustrate this with automated investment services. To the uninformed observer, all the players appear to offer the same service – a […]

How Do You Recognize a Sinking Ship?

Kenny Rogers probably didn’t realize his now famous lyrics “You’ve got to know when to hold ‘em. Know when to fold ‘em.” was also outstanding career advice. All too often people stay too long on a sinking ship, a company headed toward failure, which can have a huge opportunity cost. Few hiring managers you subsequently encounter will give you credit for staying until the end; rather you’ll likely be viewed as having bad judgment for having done so. You need to understand the early warning signs of failure so you can move on to a new company before it is too late. By the way, the high failure rate of startups is one of the reasons I recommend that people […]

10 Things You Probably Didn’t Know About Tax-Loss Harvesting (and should)

For decades tax-loss harvesting was an obscure tool to minimize taxes that was only available to the ultra wealthy. That all changed when Wealthfront launched its tax-loss harvesting service in October 2012.  Many pundits and industry professionals who were unfamiliar with its benefits thought it couldn’t add much value. One of our competitors even referred to the concept as a “joke.”  Well times have changed and now every  automated investment service offers a version of tax-loss harvesting. However, there are still many misperceptions of how and when tax-loss harvesting creates value, even among very intelligent investors. Here’s our Top 10 list of things you probably didn’t know about tax-loss harvesting: Tax-loss harvesting derives its benefit from the combination of tax-rate arbitrage […]