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 […]

The Fight for a Fiduciary Standard

Wealthfront was founded on a simple vision: that every investor, large and small, deserves sophisticated financial advice. And contrary to a large majority of the industry, we always put our clients first. A teacher making $50,000 a year deserves the same high-quality investment service as an institution managing $500 million. It’s why I signed up as a Wealthfront client when it launched, why I joined the company two years ago, and what inspires me and my colleagues to come to work each day. If you come visit our offices in Palo Alto, you’ll see a giant chalk wall in the back of the office reminding us of this. All the ideas center around one thing: doing the best possible thing […]

Don’t Believe the Hype: The Myth of High Returns and Low Downside

Common sense tells you that it’s not possible to earn a high return without taking on significant risks. And yet, the dream of a “free lunch” in investing persists. Google the phrase “high returns with low risks” and you get over 1 billion results, including articles from esteemed outlets like Forbes, TheStreet.com and MarketWatch. We hear similar promises about newfound smart-beta ETFs and other forms of financial engineering. Here’s some advice: The next time someone makes this kind of promise to you, look the other way. Because the data on how many of these promises come true is brutal. Data Don’t Lie Burt Malkiel, our chief investment officer, has pointed out for more than four decades that it is almost […]

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 […]

Introducing Kate Aronowitz, VP of Design

At Wealthfront, we are constantly pushing the boundaries of the traditional industry to deliver on our mission – everyone deserves sophisticated financial advice. We quickly learned that in order to keep delivering on this belief, we needed more than an audacious mission — we need to build an exceptional company. To achieve that goal, we need to attract world-class talent in three major areas: investment research, software development and management. I’m proud of the progress we’ve made thus far. We’ve been fortunate to attract financial luminaries like Burt Malkiel and Charley Ellis to our investment team. Our software team includes some of the best from companies like Apple, Facebook, Google and LinkedIn. Our management team includes six professionals who helped […]

Three Financial Issues to Consider When Getting Married

While it is often said that no two things are more certain than death and taxes, marriage can bring a measure of uncertainty to your taxes as well as your finances. Questions have arisen among Wealthfront’s clients about how tying the knot — a milestone in many people’s lives — can impact your financial obligations to the government, and potentially affect how you structure your finances. With this post, we share a few points on this topic. Keep in mind, however, that finances and taxes can vary greatly depending on an individual’s or a couple’s specific situation, and what state they live in. We recommend consulting a qualified accountant or tax attorney. In fact, we have written a couple of […]

How Much Should We Invest in Emerging Markets?

One of the most enduring and best-documented behavioral biases in investing is called “The Home Country Bias.” Despite the availability of well-regarded and highly profitable corporations located throughout the world, investors tend to limit their investments to those companies domiciled in their own country. At one time, a survey of institutional investors in France found that 97% of their equity investments consisted of French companies despite the fact that France represented only 3% of the world’s total equity capitalization. Such a bias is found all over the world. British investors prefer British companies, Japanese investors prefer Japanese companies, and U.S. investors prefer companies domiciled in the United States. Despite the substantial risk-reducing benefits of international diversification, investors all over the […]

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 […]

Stay the Course, Even While You’re Down

When it comes to investing, doing the right thing is usually counter-intuitive. A prime example we’ve written about before is how investing in down-markets can actually prove advantageous. This is because down markets give investors an opportunity to purchase more than they would be able to afford in an up market (See Invest Despite Volatility). We’ve also written about how individual investors find it difficult to invest rationally and tend to make mistakes by following their intuition, piling in while the market goes up and liquidating as the market goes down. This is otherwise known as timing the market. Burton Malkiel, our Chief Investment Officer views this as often being an investor’s Most Serious Mistake. But something we haven’t quantified […]

Why Index ETFs Are The Automated Investment of Choice

Vanguard Group introduced the first passive investment product, the index fund, in 1975. We’re very proud that our Chief Investment Officer, Burt Malkiel, inspired Jack Bogle, the founder of Vanguard to create the index fund when he published his groundbreaking book, A Random Walk Down Wall Street, in 1973. Eighteen years after Vanguard launched the first index fund, State Street introduced the first exchange-traded fund. ETFs have grown to more than $2 trillion in assets, having recently surpassed index funds. Practically speaking, it wasn’t until the ETF became popular, around 10 years ago, that passive investing could broadly appeal to the masses. An ETF is a basket of investments, which, like an index fund, mirrors an underlying sector or index. […]