Tag Archives: passive investing

Smart Beta

Fads and fashions have always been part of the financial markets. Around the turn of the century Internet-related stocks were regarded as reliable instruments for growing and preserving wealth. During the early 2000s, real estate was the instrument of choice for savvy investors. Today “Smart Beta” is the mantra of legions of securities salesmen who claim that broad-based low-cost index funds are sub-optimal and that better results can be obtained by biasing portfolios toward a number of characteristics that promise higher returns. There is no universally accepted definition of “Smart Beta.” What most people using the term have in mind is that it may be possible to gain excess (greater than market) returns using a variety of relatively passive investment […]

Wealthfront Named ETF Strategist of the Year

Today I am proud to announce that Wealthfront has been named the “ETF Strategist of the Year” by ETF.com (formerly IndexUniverse), the world’s leading authority on exchange-traded funds. We are especially gratified to be chosen for this award from among all investment management firms that use ETFs, not just new entrants. At Wealthfront, we strive to build a world-class investment service and we’re proud to have assembled an unparalleled investment team led by Burton Malkiel. Over the past year, we added asset classes, released an improved and more diversified investment mix, delivered different asset allocations for taxable vs. retirement accounts to improve after tax returns, and launched the Wealthfront 500. In short, we aim to relentlessly improve our service to […]

Q&A with William Sharpe: Investing In a Turbulent Market

Nobel Prize-winning economist William Sharpe recently published an article showing retirees how much more money they could have in retirement by avoiding actively managed funds in favor of index-oriented funds. In the article, “The Arithmetic of Investment Expenses” in the Financial Analysts Journal, Sharpe showed that a person saving for retirement who chooses low-cost investments instead of higher-cost investments could have a standard of living throughout retirement that is more than 20% higher. Professor Sharpe[1] recently spoke to Bill Snyder of the Stanford GSB about retirement strategies and lessons learned (or not learned) from the financial meltdown of 2007. This Q&A was adapted from that interview and used with Professor Sharpe’s permission. What did we learn from the crash and […]

Burt Malkiel On Wealthfront’s Promise

Today I am excited to announce the first significant improvements to Wealthfront’s investment service since I joined the company as chief investment officer. These improvements help minimize taxes and increase returns without exposing clients to more risk. I’ll detail the changes below, but I also wanted to tell you why I joined the company and what my first three months have been like. My mission, through my books, op-ed pieces and speeches, has been to help make it easier for average investors – the little guys — to win in the markets. I was a member of the board of directors of Vanguard, the leader in low-cost index investing, for 28 years. I still serve on Vanguard’s international board, where […]

Wealthfront’s New Investment Mix

At Wealthfront, we’re always looking for ways to increase our clients’ net-of-fees, after-tax returns without exposing them to more risk.  We’re excited to announce two major enhancements to our investment management service, driven by Chief Investment Officer Burt Malkiel: Differentiated Asset Location: We now offer different asset allocations for taxable and retirement accounts. Tax-efficient asset classes are weighted more in taxable accounts to minimize your taxes. Improved Bond Diversification: We’ve added five new income-producing asset classes to help increase returns (for the same level of risk). We estimate these changes will increase our clients’ annual net-of-fees, after-tax return by an average of 0.5% per year. Assuming you invest $100,000 over 20 years, the changes could add approximately $28,000 to your […]

Five Ways ETFs Surpass Index Funds

We often get the question from clients: What is the difference between an index fund and an ETF? Even people who understand ETFs don’t understand the difference between these two kinds of investment products. We believe ETFs are index funds, evolved. To understand why ETFs represent such an advance over index funds, you have to look a little deeper than the most basic explanation of the difference between them. Financial advisors will tell you that an ETF is different from an index fund because it trades like a stock, throughout the day. Index funds, which are a kind of mutual fund, can only be purchased or sold at the end of the day after market close. Most ETFs, like most […]

Why ETFs Are A Good Choice For Your 401(k)

This question was posted on Quora, where Wealthfront CEO Andy Rachleff answered it in shorter form. Here’s a link to that thread. The answer to this question comes down to two issues: passive investing and fees. Many academic studies have shown that on average, net of fees, index funds have outperformed actively managed mutual funds over long periods of time. Between 1982 and 1991, less than one in 10 mutual fund managers beat the market on an after-tax basis, according Robert D. Arnott, who co-authored some of the best-known research on the subject. Researchers found a similar pattern in the 1990s, according to a paper Arnott wrote with co-authors Andrew L. Berkin and Jia Ye. There are some mutual funds […]

Inside The Black Box Of ETFs: Tracking Error May Cost More Than You Know

When I was a kid growing up in Miami, I used to trade baseball cards. I thought I was very smart.  I amassed what I thought was a pretty nice collection and convinced my friends to go to baseball card shows around the city to sell off some of the crown jewels, including our vintage Mickey Mantles. They did and when we were reunited to count our winnings, it was clear to me things didn’t go like I planned. “How come we don’t have more money?  We should have made a lot more money according to the industry price lists,” I demanded of my subordinates, as I remember it.  “Yeah, but we had to pay for travel, sodas, and gum […]

ETFs Don’t Always Imply Passive Investing

ETFs are all the rage in the investment business, recently passing $1 trillion in assets for the first time (see WSJ article), spurred on during the past couple of years as the only equity investment products to log significant inflows.

This is a remarkable ramp considering ETFs were first introduced in the mid-90s with the creation of SPDRs, the first of which tracks the S&P 500 and is still the largest ETF. But from this initial index fund – which was designed to give investors a low-cost, liquid vehicle to precisely track a large basket of stocks – ETFs now encompass a sprawling and constantly evolving list of products tracking everything from industry sectors to country performance to gold to long-term US Treasuries.