It has been a brutal year for investors in both stocks and bonds, including those investing their money with the country’s robo-advisers.
The latest edition of The Globe and Mail Robo-Adviser Guide shows growth portfolios – a mix of about 80 per cent stocks and 20 per cent fixed income – among the nine Canadian players fell by between 8.1 per cent and 12.5 per cent for the year ended Aug. 31. The information is based on data provided to The Globe by the robo companies.
A number of them beat the benchmarks: Vanguard Growth ETF Portfolio (VGRO-T) was down 10.5 per cent over the same one-year period ended Aug. 31, while the iShares Core Growth ETF Portfolio (XGRO-T) was down 11.2 per cent. (VGRO and XGRO data come from Morningstar and are based on total returns, which are price changes plus dividends and interest income). The market has seen some wild swings since the data collected for the end of August, but in price terms the two benchmark ETFs are roughly in line with where they are today, including Thursday’s surge.
Diversification into bonds, U.S. and international markets – which many investors look for from robo-advisers – weighed on overall performance. Compare the 3.3-per-cent drop in the S&P/TSX Composite Index with the 11.3-per-cent drop in the S&P 500 and the 14.7-per-cent decline in the MSCI World Index over the same one-year period ended Aug. 31, according to Bloomberg data – also based on total returns.
Investors using robo-advisers may take some comfort in the probability that they’re paying lower fees on their money-losing portfolios compared with some of their peers holding higher-cost investments that are also in the red this year.
Robo-advisers continue to be a good option for investors looking to buy diversified, low-cost exchange-traded funds. Still, as noted in previous editions of this guide, there are huge differences among robos in areas such as portfolio construction and returns. It’s important for investors to understand their different fees, products and investment strategies. Also, as has been warned in this guide in the past, don’t choose a robo-adviser based on past returns alone.
Here are five observations on the data in this year’s guide:
- Mind the fees. Similar to last year, readers will note a significant variation in fees. Provided in our chart are the fees for growth portfolios, as noted. ESG portfolios often have higher fees.
- Home bias persists. Most robos have Canadian equity or bond holdings among their top-three holdings. This appears to have been a good move given the current market environment where Canada has outperformed many global markets, including the U.S. market.
- Small investors still welcome: Minimum account sizes are still relatively low, which makes robos more inclusive for newer investors.
- ModernAdvisor is not on this year’s list. The company declined to participate, saying its business model changed and all of its new clients are obtained through its referral partners. The company also said it expanded its investment shelf beyond its ETF portfolios to include actively managed and hybrid options.
- Rebrand for VirtualWealth. The platform is now called Qtrade Guided Portfolios.
What is a robo-adviser? A primer:
- What do you get? A robo will gauge your investing needs and risk tolerance and then build you a suitable portfolio of low-cost ETFs. Continuing management ensures rebalancing so you stay true to the prescribed mix of investments.
- What does it cost? Robos charge a portfolio management fee, which is generally applied monthly; there are also fees to own ETFs, but those are taken off the top of your returns by ETF companies (ETF returns are reported after fees). Commissions for buying and selling ETFs are included in the portfolio management fee. The exception is Smart Money Invest, which charges one cent per share.
- How do you track your results? On a mobile app or on your computer. Robos tend to be a step ahead of other investment companies in clearly showing personalized returns, fees and other information.
- Help: You can call or teleconference with staff; some firms assign a designated portfolio manager to clients.
- Security: Assets are typically held by third-party or related investment dealers that are members of the Canada Investor Protection Fund, which protects eligible accounts for up to $1-million in losses caused by dealer insolvency.
- Alternatives to robos: Asset allocation ETFs have fees as low as 0.2 per cent and are available in a variety of portfolio mixes. You may pay brokerage commissions to buy and sell them.
Editor’s note: A previous version incorrectly stated the three-year performance for Questwealth Portfolios was - 4.48%. In fact, the return was (positive) 4.48%. The article has been updated to reflect the correct number.
Editor’s note: Qtrade initially provided numbers that were gross of management fees for 1-year, 3-year and 5-year performance. The correct numbers, net of fees, were updated on Nov. 15.
Click here to download an Excel version of the guide.
Source: Data supplied by each robo-adviser.
Special to The Globe and Mail
With files from Rob Carrick