Find Out How Robo-Advisors Diversify Your Investments

While the decision about whether to invest with a robo-advisor is a personal one, it's useful for the investor to understand the vast diversification models within the broad automated investment advisor offerings.

When looking at the diversification of individual robo platforms, I discovered that although the majority of robo-advisors trade in exchange traded funds, there are a few that incorporate individual stocks as well. Additionally, several robo-advisors offer funds that recognize the well-researched market anomalies such as the long term outperformance of small caps and value stocks. A recent CFA blog article, "Generating Alpha by Exploiting Market Anomalies," by David Larrabee, CFA, claims that since 1926, US small cap stocks outperformed large caps by an average of 2.7% annually.

Ultimately, if you're searching for the diversification opportunities behind various robo-advisory platforms, take a look at how several companies diversify their clients' assets.

TradeKing Advisors Assets

TradeKing Advisors (TKA) takes the diversification lead with 17 funds included within their investment options. The availability of market-cap-related ETFs include a mid and small cap ETF that captures the market anomaly that small caps outperform larger cap stocks. TradeKing Advisors also nods to the value investor with a mid cap value and small cap value ETF. Other specialty TKA ETFs include several unique international funds, the iShares MSCI EAFE Small Cap (NYSEARCA:SCZ) ETF and the SPDR Dow Jones Global Real Estate (NYSEARCA:RWO) ETF. TKA tackles the bond asset class with high yield corporate and international emerging markets bond funds. Finally, this robo-advisor expands the traditional asset classes with a commodity index fund offering, iPath Dow Jones-AIG Commodity Idx TR (NYSEARCA:DJP) ETN.

Personal Capital

Personal Capital is quite unique in both its offerings, holdings and diversification orientation. At first glance, the diversification for their stock allocation is in line with many others: U.S. stocks, developed market international stocks and emerging market stocks. Yet, their methods of capturing distinct asset classes is unlike the competition. Personal Capital buys individual stocks for their client portfolios instead of choosing from existing ETFs. The firm also subscribes to a tactical sector-weighted asset allocation instead of a market capitalization-weighted approach.

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Disclaimer: I am a portfolio manager, former ...

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Barbara A. Friedberg 4 years ago Author's comment

Thanks Danielle, I'll check it out. I've thought about that topic myself.

Danielle Rogers 4 years ago Member's comment

Interesting piece, thanks. You'd probably like the recent post by Cullen Roche, "Have We Reached Peak Robo Advisor?" www.talkmarkets.com/.../have-we-reached-peak-robo-advisor