Editor’s Note: This article was updated on Dec. 2, 2020, to correct the disclosures.
Choosing an exchange-traded fund, or ETF, portfolio isn’t rocket science, but it can be confusing. According to Statista, there are nearly 7,000 ETFs worldwide. Popular robo-advisors like, Wealthfront and Betterment, have best-of-breed advisors and investment officers to cull the universe of available funds. Robo-advisors, or digital investment managers, craft investment portfolios that strive to deliver strong returns and reasonable risk. Most of the robo-advisor ETFs are low-fee and diversified.
To help you create a diversified investment portfolio, we reviewed the basic ETFs recommended by the five biggest robo advisors for their clients. All assets under management information was gathered and current as of mid-year, 2020.
Coming in with more than $161 billion assets under management AUM is Vanguard’s Personal Advisor Services. Just this year, Vanguard rolled out an all-digital platform called Vanguard Digital Advisors. The ETFs used in this platform are more transparent than those owned in the Personal Advisor Services so we’re using them instead.
Next is Schwab’s (NYSE:SCHW) Intelligent Portfolios with more than $40.7 billion AUM.
Third place is Betterment with $22 billion AUM.
Wealthfront is the fourth largest robo-advisor with $21 billion AUM.
Personal Capital rounds out the list with $14 billion AUM.
The diversification for each robo-advisor includes a wide range of asset classes. All of the robo-advisors include a broad based U.S. stock and U.S. corporate bond fund. Additionally, each provider includes at least one international stock fund. That is where the similarities end.
On the low end, the Vanguard Digital robo includes only four ETFs that represent U.S. and international stock funds and U.S. and International bond funds.
While Schwab Intelligent Advisors portfolios include 19 ETFs representing various corners of the investment markets. In the Schwab equity, or stock choices, there are several “fundamental” as well as “market capitalization weighted” funds.
The market capitalization of each stock is calculated by multiplying the share price by number of shares outstanding. The companies with the greatest market capitalization are weighted more highly than those with small market caps. While fundamental indexes use factors such as sales, cash flow, dividends and buy backs to weight the stocks. This gives a greater advantage to value stocks, within the index.
The Schwab fund universe also includes a range of bond funds, a real estate investment trust or REIT and a gold fund.
Betterment includes roughly 12 funds in their investor portfolios. This platform includes three size-based value funds, for small-, mid-, and large-caps. Betterment has six bond funds including an emerging bond fund. There are no REIT or commodity funds in the Betterment offerings.
Wealthfront comes in with 10 diversified ETFs. The unique offers in this platform include a diversified real estate investment trust, or REIT, ETF. Wealthfront also includes a dividend growth stock ETF, and energy index ETF and an emerging market bond fund.
For larger investors, Personal Capital offers individual stocks. But in their standard portfolios they include basic U.S. and international stock ETFs and two US bond funds. Like Schwab and Wealthfront, they offer a REIT fund. Personal Capital also includes a gold fund and is the only one of the five with a commodities ETF.
As previously mentioned, all of the investment managers include U.S. and international equity funds, although not all from the same fund family. The winner in the frequency contest was the Vanguard Total Stock Market Index (NYSEARCA:VTI) which was included in all of the robo-advisors except Schwab. To cover the US market, Schwab, not surprisingly, selected the Charles Schwab US Large Cap ETF (NYSEARCA:SCHX).
To cover the international equities sphere, Vanguard chose the broad Vanguard Total International Stock ETF (NASDAQ:VXUS) while Personal Capital recommends the Vanguard FTSE All-World (ex-US) ETF (NYSEARCA:VEU). Both Betterment and Wealthfront chose to break up their international holdings into developed and emerging markets with Vanguard FTSE Developed Markets Index (NYSEARCA:VEA) and Vanguard FTSE Emerging Markets Index (NYSEARCA:VWO).
Meanwhile, Schwab breaks down the international equity field into both fundamental and market-cap weighted index funds as well as two more based upon size.
In the total bond fund realm, both Vanguard and Wealthfront include The Vanguard Total Bond ETF (NASDAQ:BND). While Betterment and Personal Capital chose the popular diversified corporate bond index fund, iShares Core U.S. Aggregate Bond (NYSEARCA:AGG).
In another interesting pairing, Betterment and Wealthfront each offer the iShares JP Morgan USD Emerging Markets Bond fund (NASDAQ:EMB).
Both Betterment and Wealthfront also give a nod to inflation protection with inclusion of the Vanguard Short-Term Inflation-Protected Securities Index ETF (NASDAQ:VTIP). Wealthfront, along with Schwab also invests in the Schwab US Tips ETF (NYSEARCA:SCHP). These inflation protected funds, help to shore up portfolios should inflation devalue the dollar’s purchasing power in the future.
There are a six bond funds included with Schwab Intelligent Portfolios, including a mortgage-backed securities ETF. In another bond-heavy platform Betterment boasts seven bond funds. Although, the bond fund overlap is sparse. The Vanguard digital robo and Betterment each offer the Vanguard Total International Bond ETF (NASDAQ:BNDX).
Of the three firms that include real estate funds, Personal Capital and Wealthfront investors own the Vanguard REIT index ETF (NYSEARCA:VNQ).
The two gold loving platforms, Schwab and Personal Capital, each include iShares Gold ETF (NYSEARCA:IAU).
Which ETFs do Robo-Advisors Recommend?
The takeaway from this analysis is clear.
There’s no “perfect” ETF portfolio. Each individual exchange-traded fund includes thousands of individual investments. This means that as long as you invest in a few basic asset classes, like U.S. and international stock and bonds, you’ll have excellent diversification.
While one portfolio might outperform one year, there’s not guarantee that the same will repeat in the future.
Vanguard demonstrates that you can get sufficient diversification with just four funds, while Schwab believes that more ETFs leads to a better outcome.
The relatively small overlap of ETFs among robo-advisors suggests that there is a large universe of low-fee diversified ETFs available. The number of funds you choose is a personal matter and there’s no right or wrong number of ETFs to own. In fact, you could probably get a diversified portfolio with just two funds: a diversified all-world stock ETF and another broad bond fund.
On the date of publication, Barbara Friedberg was long VTI, VWO, VEA, VNQ and IAU.
Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is editor/author of Personal Finance; An Encyclopedia of Modern Money Management and two additional money books. She is CEO of Robo-Advisor Pros.com, a robo-advisor review and information website. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Finance.com. Follow her on twitter @barbfriedberg and @roboadvisorpros. As of this writing, she did not hold a position in any of the aforementioned securities.