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Commission-Free ETFs Aren’t What They Seem

Much has been made of the launch of commission-free ETF trading programs at places like Charles Schwab, Fidelity, TD Ameritrade and others. But are these a good deal? Let’s start with the positives. If you are a retail investor regularly socking away $100 or $500 or $1,000 (or even $10,000) a month, and you’re buying ETFs and paying a commission on those trades, you’re doing yourself a disservice. If the average portfolio holds seven ETFs (like most Wealthfront portfolios), and you’re paying a $8.95 commission each time you invest, you’re paying $63.65 to make these trades (7 * $8.95 = $63.65). That’s 60% of your investment if you’re putting $100 to work each month, which is obviously absurd. But it’s […]

Real World Data: Wealthfront Tax-Loss Harvesting

Nothing we write about at Wealthfront raises people’s interest like tax-loss harvesting. The spectrum of opinion is extreme; with some believing it’s a brilliant advantage for investors and others convinced it’s chicanery. We launched our automated daily tax-loss harvesting service almost three years ago and have been running the service ever since. As a result, we have more empirical evidence on the actual performance of an automated strategy than anyone. We recently analyzed our empirical results over that time period and thought we would share that data to further understanding of this innovative and beneficial investment strategy. A History of Tax-Loss Harvesting The concept of tax-loss harvesting has been around for more than a century. For that entire time it […]

Not Everyone Wants to Manage Their Own Investments

One of the biggest lessons I teach my MBAs at Stanford Graduate School of Business is to not project their tastes onto others when evaluating a business idea. That’s very hard advice to take because human nature leads us to think others must share our views. A product or service’s success doesn’t depend on whether you like it. Rather it depends on whether the target audience – of which you may not be a part – likes it. This insight was critical to my and my Benchmark partners’ success as venture capitalists. And yet, I constantly see this mistake made when people talk about the investment industry. It might surprise you to learn that approximately 75% of US individuals prefer […]

What Greece and China Teach Us About Investing

It’s been a crazy couple of weeks for the investing world. China’s stock market – after one of the biggest run-ups of any market in history – has suffered a 40% collapse in just a few weeks. Greece has teetered on the brink of default, and still may or may not exit the Euro. The U.S. has drawn up a major new deal with Iran; oil is down sharply; and Indian stocks are rallying like mad. What should an investor do? In a word: Nothing. If there’s anything that the day-by-day machinations of the market teach us, it is that slow and steady wins the race. The Incredible Mean-Reverting Nature of Stock Returns Investors have long known that staying the […]

Why Do Vanguard ETFs Dominate Low-Cost Portfolios?

Vanguard

The rise of exchange-traded funds, or ETFs, has been a critical factor in the rise of automated investment services like Wealthfront. ETFs are on average cheaper, more tradable and more tax-efficient than traditional index funds (see Why Index ETFs Are The Automated Investment of Choice). They allow everyday investors to access the same high quality products at the same ultra-low prices as the largest institutional investors in the world. There are now more than 60 companies offering ETFs in the U.S. with a combined $2.1 trillion under management. If you look at the average Wealthfront portfolio, however, you’ll notice it’s dominated by ETFs from one firm: Vanguard. On average, upwards of 90% of our initial portfolio allocations go into Vanguard […]

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 […]