Wealthfront ignores own advice; adds Smart-Beta

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simplesauce
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Wealthfront ignores own advice; adds Smart-Beta

Post by simplesauce » Fri Jun 16, 2017 9:15 am

This is really astounding. Burton Malkiel and Charlie Ellis both have written and spoken extensively about the unknowns regarding factor investing, using momentum, value, and small stocks for example. They have been champions of market-cap weighted portfolios.

However, they are changing their portfolios now. This is unbelievable. What changed their minds? Is there any merit to this? As a big Malkiel and Ellis fan, I find this all very conflicting and confusing. The "plain vanilla indexing" club is getting smaller and smaller each year that passes by. Is it time for me to embrace smart-beta, or stay the course with Mr. Bogle? I think he's the only one left!

http://www.wealthmanagement.com/technology/wealthfront-pivots-embrace-smart-beta
Last edited by simplesauce on Fri Jun 16, 2017 9:46 am, edited 2 times in total.

PFInterest
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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by PFInterest » Fri Jun 16, 2017 9:30 am

what do you mean what changed their minds? its called money.

livesoft
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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by livesoft » Fri Jun 16, 2017 9:31 am

OK, I'm done with SmartBeta. Time for me to pivot to something else.
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Texanbybirth
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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by Texanbybirth » Fri Jun 16, 2017 9:38 am

It's amazing to me that all these robo-advisors seem to be growing at a very good pace, and it seems that traditional money-management firms are taking it on the chins. I don't know how the latter can survive.

Raabe34
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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by Raabe34 » Fri Jun 16, 2017 9:46 am

Texanbybirth wrote:It's amazing to me that all these robo-advisors seem to be growing at a very good pace, and it seems that traditional money-management firms are taking it on the chins. I don't know how the latter can survive.


I disagree. Do the math on the robos, they are burning extremely quickly through their venture capital money because they are hugely cash flow negative.

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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by nisiprius » Fri Jun 16, 2017 10:41 am

Instability has been the hallmark of Wealthfront. If I were interested in investing with them I'd be moderately concerned with the number of times they've changed their identity and strategy since they were first created in 2009 as "kaChing." The only constant has been Andy Rachleff.

The firm started out as a company that was going to let you hitch your personal investment wagon to some individual hotshot star, chosen from list of supposedly brilliant investors. Then it was going to let you replicate the investment strategies used by Ivy League endowment funds for their equities investments, which had--according to Rachleff--decisively beaten the market. Then Burton Malkiel came on board, with a generally Bogleheadish approach with some of Malkiel's personal preferences. Then it seemed to be about tax-loss harvesting. And now we're into buzzword-compliant factor-based investing.

They now have a registered trademark, PassivePlus®. I think that means "active," but who knows? Very reminiscent of Fidelity's "enhanced index" funds from a few years ago.
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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by dspencer » Fri Jun 16, 2017 10:45 am

PFInterest wrote:what do you mean what changed their minds? its called money.


Yeah it seems to me that the primary motivation is marketing. Now they can show a made up chart that shows how much extra money you will make with their proprietary system.

In their defense, it seems that some of their criticisms from the past related to companies charging extra fees for this strategy and they are (for now!) offering the service at no extra charge, although there is a minimum balance.

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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by livesoft » Fri Jun 16, 2017 10:49 am

Texanbybirth wrote:It's amazing to me that all these robo-advisors seem to be growing at a very good pace, and it seems that traditional money-management firms are taking it on the chins. I don't know how the latter can survive.

I also disagree. There have been a few articles about how robofirms are really burning through the VC money they got. They need to have an exit plan and for many of them it seems the exit plan is to sell themselves to a traditional money-management firm.
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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by Random Walker » Fri Jun 16, 2017 10:55 am

With regard to Bogle and TSM investing, I can't help but feel he has a bit of a value tilt in his spirit. He certainly appreciates that valuations matter and I believe he has held on to VG Windsor for many decades. I realize he does it for sentimental value and he has huge capital gains, but nonetheless I think he's got a bit of a valueish mindset.

Dave

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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by dspencer » Fri Jun 16, 2017 11:09 am

nisiprius wrote:Instability has been the hallmark of Wealthfront. If I were interested in investing with them I'd be moderately concerned with the number of times they've changed their identity and strategy since they were first created in 2009 as "kaChing." The only constant has been Andy Rachleff.

The firm started out as a company that was going to let you hitch your personal investment wagon to some individual hotshot star, chosen from list of supposedly brilliant investors. Then it was going to let you replicate the investment strategies used by Ivy League endowment funds for their equities investments, which had--according to Rachleff--decisively beaten the market. Then Burton Malkiel came on board, with a generally Bogleheadish approach with some of Malkiel's personal preferences. Then it seemed to be about tax-loss harvesting. And now we're into buzzword-compliant factor-based investing.

They now have a registered trademark, PassivePlus®. I think that means "active," but who knows? Very reminiscent of Fidelity's "enhanced index" funds from a few years ago.


The "Direct Indexing" makes sense to me if you're going to have someone (or some algorithm) manage your money. It allows them to avoid layering their fees on top of the ETF fees. Basically you end up with a diversified portfolio that is tax loss harvested and don't have to do anything personally to manage it. Still more expensive than a DIY, but probably cheaper than how 90% of people choose to invest.

The "Advanced Indexing" seems a bit like mission creep. Someone posted an interview with Jack Bogle that included his thoughts on Smart Beta. He had a nice logical way of looking at it basically stating that once you deviate from market cap weighting, you won't get market returns. Whether that is higher or lower is unknown as of now. As you said, using "PassivePlus" to try to beat the market at the risk of under-performing it sounds a lot like active management.

I don't know enough to say whether it's a smart way to juice your returns or simply a gamble trying to chase past performance. It's probably not crazy to tilt a small amount if you think there is a sound basis for future out-performance. However, I get wary when companies are projecting the extra returns over the market as if they are certainties. Why not just cherry pick the best performing stocks and then build a portfolio of those and project their future returns the same way? The 30 returns only matter to WealthFront if they survive. Right now they have to worry about building revenue and achieving a profitable economies of scale.

I think the concept of robo-advisors is sound but I worry that the short term motivations and drive to seem "better" will lead to problems.

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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by dspencer » Fri Jun 16, 2017 11:11 am

livesoft wrote:
Texanbybirth wrote:It's amazing to me that all these robo-advisors seem to be growing at a very good pace, and it seems that traditional money-management firms are taking it on the chins. I don't know how the latter can survive.

I also disagree. There have been a few articles about how robofirms are really burning through the VC money they got. They need to have an exit plan and for many of them it seems the exit plan is to sell themselves to a traditional money-management firm.


I would love for Vanguard to buy Betterment's user interface design team. If they could add in a super cheap option for tax-loss harvesting your existing investments, even better.

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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by dduke12 » Fri Jun 16, 2017 11:32 am

I like the robo concept---sure, one could go at it alone but it makes it much more convenient to go with an automated platform. I think that at some point, the smaller robo's will start to close or get bought, then one of the bigger ones will get absorbed by the Schwab/Vanguard/Fidelity.

I just see Wealthfront and Betterment one day getting bought, and the founders cashing in.

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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by unclescrooge » Fri Jun 16, 2017 11:39 am

Texanbybirth wrote:It's amazing to me that all these robo-advisors seem to be growing at a very good pace, and it seems that traditional money-management firms are taking it on the chins. I don't know how the latter can survive.


Wait until the next correction.

I'm confident a lot of their clients have been ramping up their equity allocation as the bull market had continued. This is very easy to do on their platforms.

It's the clients who will be taking it on the chin in the next bear market.

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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by nisiprius » Fri Jun 16, 2017 12:44 pm

unclescrooge wrote:
Texanbybirth wrote:It's amazing to me that all these robo-advisors seem to be growing at a very good pace, and it seems that traditional money-management firms are taking it on the chins. I don't know how the latter can survive.


Wait until the next correction.

I'm confident a lot of their clients have been ramping up their equity allocation as the bull market had continued. This is very easy to do on their platforms.

It's the clients who will be taking it on the chin in the next bear market.
And the clients of traditional firms won't? Because the human managers at the traditional firms are smart enough to see the bear market coming and get their clients out safely, just in time?

Or are you saying that human advisors give consistently more conservative advice than roboadvisors, and, if so, do you have evidence for that?
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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by unclescrooge » Fri Jun 16, 2017 1:35 pm

nisiprius wrote:
unclescrooge wrote:
Texanbybirth wrote:It's amazing to me that all these robo-advisors seem to be growing at a very good pace, and it seems that traditional money-management firms are taking it on the chins. I don't know how the latter can survive.


Wait until the next correction.

I'm confident a lot of their clients have been ramping up their equity allocation as the bull market had continued. This is very easy to do on their platforms.

It's the clients who will be taking it on the chin in the next bear market.
And the clients of traditional firms won't? Because the human managers at the traditional firms are smart enough to see the bear market coming and get their clients out safely, just in time?

Or are you saying that human advisors give consistently more conservative advice than roboadvisors, and, if so, do you have evidence for that?


Neither.

I'm saying that human advisors are more likely to insist clients keep their AA constant, and not keep mucking with it. Based on my limited experience over nearly 20 years, I see my friends want to increase equity exposure late in a bull market, and tone it down right after a huge drop. I'm saying that robos don't change this self-sabotaging behavior.

Note, I'm assuming that the advisors know what they're doing, even if they are expensive. Also assuming you're not dealing with a crook or someone completely incompetent.

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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by afan » Fri Jun 16, 2017 4:46 pm

keybounce duplicate
Last edited by afan on Fri Jun 16, 2017 4:47 pm, edited 1 time in total.
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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by afan » Fri Jun 16, 2017 4:47 pm

unclescrooge wrote:Neither.

I'm saying that human advisors are more likely to insist clients keep their AA constant, and not keep mucking with it. Based on my limited experience over nearly 20 years, I see my friends want to increase equity exposure late in a bull market, and tone it down right after a huge drop. I'm saying that robos don't change this self-sabotaging behavior.

Note, I'm assuming that the advisors know what they're doing, even if they are expensive. Also assuming you're not dealing with a crook or someone completely incompetent.


More likely it goes like this:

The human advisors charge higher fees, have higher margins, and can better sustain a drop in assets under management without going under. A robo that is not breaking even could go out of business if it had an even lower asset base and even lower revenue.

The investors who use human advisors may play musical chairs with their advisors, pulling their money of out advisor A and giving it to advisor B. At the same time, some will pull money from B and give it to A. Those who are convinced they need human advisors will rotate but not decide to go it alone. The total AUM for the human part of the industry might decline as the total value of the market goes down, but Morgan Stanley and the like will weather a lot more storms before everyone bails on them and switches to Vanguard.

Wealthfront has occupied all possible positions on the continuum from aggressive active management to pure indexing. I think they figured out pretty quickly that pure market weight indexing would not make money- what do you need Wealthfront for? So they cycled through as many variations on active management as they can dream up.

Amazingly, each version is always the BEST, BIGGEST, SHINIEST way to invest, and we have purely speculative white papers to prove it. During one of their earlier iterations of active management, when they matched clients with managers, they had a white paper showing how much better one would have done with the active managers. If you read the fine print, the whitepaper disclosed that the trades it modeled need not have been trades actually executed by ANY of the active managers it used. In other words, the model performance had no relation to the real world.

Wealthfront is not in the investment management business. It is in the marketing business. "Brilliant investing idea"="Something that we can sell to potential clients, given the right buzzwords and window dressing"
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by unclescrooge » Sat Jun 17, 2017 7:01 am

afan wrote:
unclescrooge wrote:Neither.

I'm saying that human advisors are more likely to insist clients keep their AA constant, and not keep mucking with it. Based on my limited experience over nearly 20 years, I see my friends want to increase equity exposure late in a bull market, and tone it down right after a huge drop. I'm saying that robos don't change this self-sabotaging behavior.

Note, I'm assuming that the advisors know what they're doing, even if they are expensive. Also assuming you're not dealing with a crook or someone completely incompetent.


More likely it goes like this:

The human advisors charge higher fees, have higher margins, and can better sustain a drop in assets under management without going under. A robo that is not breaking even could go out of business if it had an even lower asset base and even lower revenue.

The investors who use human advisors may play musical chairs with their advisors, pulling their money of out advisor A and giving it to advisor B. At the same time, some will pull money from B and give it to A. Those who are convinced they need human advisors will rotate but not decide to go it alone. The total AUM for the human part of the industry might decline as the total value of the market goes down, but Morgan Stanley and the like will weather a lot more storms before everyone bails on them and switches to Vanguard.

Wealthfront has occupied all possible positions on the continuum from aggressive active management to pure indexing. I think they figured out pretty quickly that pure market weight indexing would not make money- what do you need Wealthfront for? So they cycled through as many variations on active management as they can dream up.

Amazingly, each version is always the BEST, BIGGEST, SHINIEST way to invest, and we have purely speculative white papers to prove it. During one of their earlier iterations of active management, when they matched clients with managers, they had a white paper showing how much better one would have done with the active managers. If you read the fine print, the whitepaper disclosed that the trades it modeled need not have been trades actually executed by ANY of the active managers it used. In other words, the model performance had no relation to the real world.

Wealthfront is not in the investment management business. It is in the marketing business. "Brilliant investing idea"="Something that we can sell to potential clients, given the right buzzwords and window dressing"


Interesting points.

Wealth front is sure doing a good job of marketing!
I'm surprised it's not profitable.

Do you have an opinion on betterment?

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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by knpstr » Sat Jun 17, 2017 7:19 am

simplesauce wrote:Is it time for me to embrace smart-beta...?


No.
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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by Raabe34 » Mon Jun 19, 2017 12:53 pm

Betterment is not close to profitability either. Morningstar had a good piece written maybe 2 years ago now.

The way I see it, it's almost impossible for them to ever achieve profitability and they're just trying to look good enough to get bought.

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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by garlandwhizzer » Mon Jun 19, 2017 6:56 pm

There is a bandwagon of money now seeking factor approaches and I suspect Wealthfront, like other financial companies, is shooting for a slice of that market with this new approach. The profit motive drives the vast majority of corporate decisions.

When it comes to factors these are tough times to try to market value, the most popular single factor approach. Investors as a whole are performance chasers and value has been disappointing for a decade or more. Most investors don't have the stomach for that. Money managers are on a short leash these days. If they underperform indexes for a year or more, money often bails out and heads to Vanguard's index funds. So to be successful and keep factor investors on board the train through tough times when the most popular single factor has tanked for more than a decade, what does one do? Ah, the appeal of multi-factor approaches. Typically when value tanks, MOM and QUAL do considerably better for example. So I believe this is an example of well-constructed marketing aiming to hook a nice slice of the factor investing market and by offering less expected tracking error than a single factor approach, the multi-factor may be better at keeping them on board. Backtesting multi-factor approaches is impressive and appears to achieve the impossible: higher return with lower risk.

Sounds very appealing. The problem is that to my knowledge thus far, must-factor funds haven't lived up to the theoretical promise of higher returns with lower risk. These complex and expensive products involve a very long, dynamic, and twisting decision tree to execute. Which factors to choose? Should you equal weight all factors or give preference to one or two and de-emphasize the others? Should allocation between factors be static or dynamic? If dynamic, by what criteria do you alter allocations? How frequently should portfolios be turned over? Should your portfolio turn over value which is a long term trading strategy at the same rate as MOM, a short term, in-out strategy requiring frequent trading? Timing of buy and sell decisions is difficult and critical in all factor investing execution and when you have multiple factors with different timing algorithms it gets pretty complicated as well as expensive. Lots and lots of different moving parts which change in relation to each other from time to time. Some factors are locked in open conflict with others (value and MOM for example), some have very high trading costs and frictions (MOM in the MC and SC spaces). Add to that the market's tendency to sometimes overprice popular factors, reducing their long term expected returns. Should multi-factor portfolios sell the long term winners that are generously priced and load up on the more reasonably priced ugly ducklings, or will investors flee if the same pattern continues for a few more months/years?

It is very easy for academics and analysts to backtest the past and pick out what approach worked best. The past has no uncertainty and is accessible to computing. Creating a multi-factor portfolio based on what has happened over a given time frame in the past is not difficult. If you can do arithmetic you can select the right trading criteria, when to sell and when to buy, which factors to overweight and which to underweight, etc., in order to maximize past returns with minimal risk. Whether those same criteria will work the same way in the future is IMO an entirely different question. The future, unlike the past which is fixed and static, is full of uncertainty. What worked over the last decade or two or three may not work in the next decade. Being a brilliant and knowledgeable manager is not sufficient to achieve goals. Check out the hedge fund/active management graveyard if you don't believe it. Thus far, it appears to me that the details of how to reliably do this complex strategy and put dollars in the pockets of investors rather than managers haven't been worked out sufficiently. Multi-factor approaches are wonderful in theory but sometimes fall short in reality.

We'll see what Wealthfront does in this arena. They, like AQR, are smart guys and students of the market, trying to do their best to get results. The markets may or may not co-operate.

Garland Whizzer

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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by nedsaid » Mon Jun 19, 2017 7:24 pm

I suspect the reason that Ellis and Malkiel have thrown their lot with factor investing is the need to differentiate yourself from your competitors. Marketing. Right now, everyone's main competitor is Vanguard. The thing is, why have Vanguard plus when you can get the real thing at Vanguard and cheaper? By "plus" I mean the extra fees you pay the robots to buy and rebalance index funds for you. Gee whiz, Vanguard could do that for you and probably with a LifeStrategy fund. No need to even pay Vanguard Advisory Service.

Is Wealthfront going to say that their robots are better than Betterments? Or that their robots are cheaper? So pretty much, you have to do factors and turn the robots loose on capturing whatever excess returns factors might generate. My marketing idea is to say that my robot avoids the "anti-factors", but as I described in earlier posts, well constructed indexes do that well anyway.

This isn't going the way that I imagined. I thought that factors, particularly small and value, would work because Wall Street wasn't interested. Small/Value tilting is becoming more popular. Now the Wall Street marketing machine is cranking up and going where I never thought they would go. First, they are going for more passive strategies. Second, the "unpopular" areas of the market have become very popular. Low volatility in my mind is a factor that has been overgrazed, now the "safe" stocks are more expensive than the market itself. Dividends are the craze now too, some people are only now beginning to realize that interest rates have been low; now after eight years of yield chasing, these folks are piling into dividends just as the Federal Reserve Bank is raising short term interest rates. This is not going to end well.

I thought I was being contrarian with my factor tilts. Now factor tilting is the new orthodoxy and the market cap weighted indexers are the contrarians. Even on the Bogleheads. Imagine that.

I will keep saying what I have said now for at least three years. Don't chase dividends. Don't chase low-volatility. The place to be is Large Cap Value, yes, good old boring Large Value. Someday I will be right.
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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by jalbert » Mon Jun 19, 2017 7:53 pm

Wealthfront intends to be a profit-making venture. The best way to pursue that goal is to offer what their prospective customers (currently) believe they need.
Risk is not a guarantor of return.

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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by in_reality » Tue Jun 20, 2017 5:08 am

simplesauce wrote:This is really astounding. Burton Malkiel and Charlie Ellis both have written and spoken extensively about the unknowns regarding factor investing, using momentum, value, and small stocks for example. They have been champions of market-cap weighted portfolios.

However, they are changing their portfolios now. This is unbelievable. What changed their minds? Is there any merit to this? As a big Malkiel and Ellis fan, I find this all very conflicting and confusing. The "plain vanilla indexing" club is getting smaller and smaller each year that passes by. Is it time for me to embrace smart-beta, or stay the course with Mr. Bogle? I think he's the only one left!

http://www.wealthmanagement.com/technology/wealthfront-pivots-embrace-smart-beta


Whatever you do, I wouldn't use wealthfront.

I think their Advanced Indexing implementation is quite poor.

First, you need $500,000 for their basic level. That only include stocks in the S&P500. For your remaining midcap and smaller stocks, they use a standard completion index Vanguard Extended Market ETF (VXF).

If you get to $1,000,000 they do large and midcap stocks in Advanced Indexing, but use a standard market cap weighted small cap fund [Vanguard Small-Cap ETF (VB)].

I have serious doubt about their selected stock universe and believe it reflects that some factors are expensive now (such as minimum volatility), and while I know some claim multi-factor funds are superior, I think most stocks loading on minimum volatility are going to be more expensive and thus have lower expected future returns. It probably looks good in their backtesting though.

Also, there's no mention of anything international (which may be attractive to some I guess) other than saying "daily Tax loss harvesting at the ETF level". Really? That's what Schwab does already and at least breaks it down into large developed value, small developed value, large developed cap weighted, small developed cap weighted, large emerging value, large emerging cap weighted so give a better chance to TLH. I bet wealthfront will use market cap weighted Vanguard total market or developed/emerging split.

They criticize the ER on Schwab's fundamental indexes, but I think they makes more sense in that they give value exposure in smaller companies and do so in a more sector neutral way, and they also weed out negative momentum (which DFA ended up doing too). There are posts recently about what would happen if indexing got too popular, but the fundamental indexes aren't cap weighted and aren't adding to that potential problem. Plus they have international funds (large/mid, small and large/mid emerging).

Anyway, Wealthfront's backtested performance results surely don't include trading costs which as they point out:

Wealthfront’s investment strategies, including portfolio rebalancing and tax loss harvesting, can lead to high levels of trading. High levels of trading could result in (a) bid-ask spread expense; (b) trade executions that may occur at prices beyond the bid ask spread (if quantity demanded exceeds quantity available at the bid or ask); (c) trading that may adversely move prices, such that subsequent transactions occur at worse prices; (d) trading that may disqualify some dividends from qualified dividend treatment; (e) unfulfilled orders or portfolio drift, in the event that markets are disorderly or trading halts altogether; and (f) unforeseen trading errors.
[60% US _ 26% DEV _ 14% EM] | (-16% LC _ +8% MC _ +8% SC) | [47% FND/VAL _ 40% MKT _ 7% MOM _ 6% REIT] | (+/- 5% or *25% rebalancing bands)

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Re: Wealthfront ignores own advice; adds Smart-Beta

Post by Theoretical » Tue Jun 20, 2017 12:29 pm

There are many roads to Dublin, but changing roads as frequently as they have done is not one of them. First it was replace safe bonds with dividend stocks and EM bonds. Now it's multifactor after bashing anything other than market cap weighting. PASS.

The last thing I want to do is hold 600-800 large caps individually where they'll be frequently traded for tax advantages. Hello transaction fees for little point in the single most efficient part of the US equity market.

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