Which Robo Advisors are Prepared for Inflation? 2021 Robo Performance
Posted on August 23, 2021
- According to the Bureau of Labor Statistics, the CPI for All Urban Consumers increased 5.4% from June 2020 to June 2021. This is the largest 12-month advance since the year ending August 2008.
- This coincided with new winning robo advisors: Schwab, Wealthfront, Schwab, & Morgan’s Inflation Conscious option.
YTD: Schwab, Wealthfront, and Morgan’s Inflation Theme Shine
Year-to-date, we are looking at a new group of top-performing robo advisors. Rather than relying on a U.S. large-cap growth tilt, our year-to-date winners, Schwab Domestic Focus, Wealthfront, Schwab’s standard portfolio, and Morgan Stanley’s Inflation Conscious portfolio, experienced different drivers of return. This year-to-date analysis puts a spotlight on some of the more interesting and unique aspects of portfolio construction for robo advisors.
Schwab’s Success
When looking at the drivers of return for both Schwab accounts, there are a few major themes. First, nearly half of Schwab’s equity portfolio was invested in fundamental index funds. These are ETFs that weight stocks by their fundamentals, like cash flows, sales, and dividends. This resulted in a substantial value tilt. For example, FNDX, Schwab’s fundamental U.S. large-cap ETF, and FNDA, the small-cap version, held 49% value stocks and 42% value stocks, respectively, while both funds held less than 15% growth names. This resulted in both funds contributing to
strong performance over the shorter time periods where value has outperformed growth. For investors in Schwab’s Intelligent Portfolios, if the backdrop of economic recovery continues, these fundamental ETFs may continue to drive relative returns.
Inflation-Fighting Robo Advisors?
Wealthfront and Morgan Stanley’s Inflation Conscious portfolio took second place and tied for third place, respectively. Wealthfront’s equity portfolio stands out for its unique holding of VDE, a Vanguard Energy ETF that tracks stocks in the energy sector. This fund returned 49.05% for the 6-month period ending June 30, 2021, significantly outpacing the S&P 500. Wealthfront’s allocation of nearly 10% of its equity holdings to this fund paid off tremendously for investors. In tandem with a 10% allocation to SCHD, a dividend-payers ETF, Wealthfront successfully complemented its equity portfolio with two funds that were stellar performers for the last six months. Wealthfront’s thoughtful VDE allocation did what it was designed to do (protect against inflation) while SCHD captured the value rotation nicely when looking at more recent performance periods.
When looking at Morgan Stanley’s Inflation Conscious portfolio, the first thing that stands out is that it successfully delivered on its theme by performing best in response to the rising specter of inflation. PBDC, a diversified commodity strategies fund, and TPYP, a consumer energy fund specializing in pipelines, were two of the unique holdings that propelled returns. Commodities surged during the year due to the recovering economy and limited supply, resulting in strong growth of prices across lumber, rubber, and other commodities. Meanwhile, with the advent of the Biden administration’s potential infrastructure bill, pipelines may continue to demonstrate a strong return profile. Both of these funds, along with high allocations to REITs, made this inflation-conscious portfolio fulfill its intention.
Posted in PerformanceTagged Morgan Stanley, Schwab, Wealthfront
