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Wealthfront Pivots To Embrace Smart Beta

Despite criticizing competing robos for including smart beta strategies, Wealthfront is now offering them through Advanced Indexing.

Wealthfront is looking to lure wealthier investors to its automated investing service by adding an investment strategy that the company previously attacked Charles Schwab for adding to its robo advisor.

On Thursday, the Redwood City, Calif.-based company announced the new feature, Advanced Indexing, on its official blog, explaining that it works to increase an investor’s returns by weighting the individual securities in a portfolio more intelligently.

Wealthfront pairs Advanced Indexing with its Direct Indexing product to minimize the impact of taxes on excess returns, and says that while 95 percent of smart beta ETFs only use one factor, Wealthfront diversifies across factors to improve returns and maximize chances of outperforming a cap-weighted index without changing a portfolio’s risk. It also isn’t charging any additional fees for Advance Indexing.

According to the company’s research, which it details in a whitepaper, Wealthfront expects the U.S. stock allocation of a client’s portfolio to outperform the cap-weighted index by up to 1 percent annually because of Advanced Indexing.

The company said Advanced Indexing is “an improvement on a strategy commonly referred to as ‘Smart Beta,’” and in a separate statement, noted that it was conceived by a team led by Wealthfront Chief Investment Officer Burton Malkiel and Vice President of Research Jakub Jurek.

This is interesting because in 2015, former Wealthfront CEO Adam Nash wrote a scathing article criticizing Charles Schwab’s robo advisor for, among other things, allocating users to smart beta ETFs.

“The average smart beta ETF that Schwab has selected not only has 3 times the management fees of the average Vanguard ETF, but not surprisingly, all are either proprietary Schwab ETF products or ETFs from issuers that pay Schwab to use them,’ Nash said. He included a quote from John Bogle saying “smart beta is stupid” and referenced Malkiel’s feelings about smart beta. “Last year, Burt Malkiel, our CIO, explained why smart beta products are not smart investments.”

Just a year ago, Malkiel reiterated his disdain of smart beta to the Wall Street Journal, saying they are riskier than index funds and just a new way for managers to justify fees. In a 2016 update of his book, “A Random Walk Down Wall Street,” he devotes a chapter to arguing why smart beta isn’t good for individual investors.

The pivot did not go unnoticed on social media.

 

A Wealthfront spokesperson said the company had been skeptical of existing smart beta solutions because they added tax inefficiency into the investment strategies, and that more often than not the expense ratios attached to smart beta would negate any end benefit to the client. By pairing smart beta with stock-level tax loss harvesting and not charging any additional fees, Wealthfront says Advanced Indexing avoids both of these problems.

Adam Nash also gave his take on Twitter.

With Advance Indexing, Direct Indexing and tax-loss harvesting, Wealthfront says it has three investment features that can’t be found combined anywhere else. The company now has a trademarked named for the suite of features: PassivePlus. On the blog, Wealthfront says a person investing $100,000 today — assuming a risk score of seven, quarterly deposits of $10,000 and a 5.3 percent market returns — can expect PassivePlus to generate an extra $1.55 million for their portfolios.

 

While Wealthfront offers tax-loss harvesting to all accounts, Direct Indexing is only available to clients with at least $100,000 invested, and Advance Indexing only to accounts with at least $500,000. The company did not answer why it doesn’t offer these features to smaller accounts.

Wealthfront now manages $6.7 billion in assets and says it added about $2 billion in the first five months of 2017.

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