Published on ETF.com I 23 October, 2015

Wall Street has experienced a revolution in the investment industry. Services such as Wealthfront, Betterment and Vanguard’s Personal Advisor in the U.S. have shifted to providing investment advice online. These so-called robo-advisors assess an investor’s appetite for risk and match it with a diversified portfolio of exchange traded funds (ETFs), and a large part of the portfolio management is handled by algorithms.

The increasing popularity of robo-advisors leads A.T. Kearney to expect assets under management of these firms to reach $2 trillion by the end of 2020 in the U.S. This figure represents a market share of 5.6 percent, up from just 0.5 percent today. It is also likely that consumers will experience a rapid evolution of these platforms as technology will continue to push the intelligence of automated advice and algorithms to the next level.

The robo-advisory landscape in Europe is still in its infancy compared with the market in the U.S.

Nutmeg and Swanest in the UK, vaamo in Germany, TrueWealth in Switzerland, MoneyFarm in Italy and Marie Quantier in France are setting the stage. The winner is the consumer, profiting from decreasing prices, greater access to investment advice, smarter services and a lot more transparency.

Common among all these ventures is their endorsement of ETFs, which they use to build diversified investment portfolios.

The Robo-Advisors’ Preferred Choice

ETFs are a smart investment choice, but not only because of their low-cost approach to market exposure. Their beauty also lies in their simplicity and transparency. Active fund managers often struggle to define exactly where their client’s money is invested, as positions in a fund can change on a daily basis. Even worse are fund of funds, blurring the holdings even more.

As ETFs track a benchmark index, it becomes very easy for an investor to identify his/her holdings. If someone acquires an ETF that tracks the FTSE 100 index, the investor will simply be holding the 100 largest companies in the UK.

ETFs not only enable investors to access mainstream markets like the FTSE 100 and the Nikkei 225, they also offer an entire universe of possibilities: access to single countries, industries and commodities are made possible through the bundling of stocks, bonds and futures in the form of ETFs.

Furthermore, ETFs are traded on the stock exchange: anyone with an online brokerage account can enjoy access.

Education Is Still Needed: Robo-Advisers Can Help

As more and more evidence supports the benefits of ETFs, an increasing amount of investors are moving their assets into these vehicles. A study from Vanguardshows that 30 percent of mutual funds’ assets in the U.S. are managed passively, compared to 12 percent in Europe. In addition, the industry grew 27 percent in the U.S. and 35 percent in Europe on an annual basis over the last 10 years. However, the major part of these assets are coming from institutional players and not from retail investors.

The reason the average investor is not aware about ETFs is simple. Traditional financial institutions cannot make profit from ETFs. Banks offer free investment advice, but make money with the management of their own funds that they promote and administer. In the past, investment advisers often received kick-backs, a form of remuneration paid by providers of actively managed funds to advisers for the promotion of their products, effectively eliminating advisers’ incentive to inform clients about ETFs. However, with the implementation of MiFID such practices are no longer allowed. As a consequence, investment advisers have to reinvent their fee structure.

Robo-advisors do not take commission from third parties: they earn revenue through the provision of asset allocation, return optimisation and tax-loss harvesting. They tend to be much cheaper than traditional fund management services and thereby democratise the wealth management industry.

However, it is worth mentioning that the world needs traders who set prices in the markets. If everyone just followed the stock market, say, via an ETF, the system as it is designed today would not work.

All Plain Vanilla?

ETFs offer a tremendous number of benefits, compared with traditional investment products. But at Swanest, not all ETFs are equal and we have to be astute when we select a product.

ETF providers have become creative and started offering leveraged products, possibilities to shorten positions and apply alternative indexing methods. Investors do therefore need to be careful not to take a risk they do not fully understand. Don’t forget that certain ETFs might not be highly liquid in the market and therefore may cause bid-offer spreads that can negatively impact investment performance.

Despite these considerations, ETFs remain highly attractive. They offer a very smart investment strategy at a low cost, are extremely transparent and provide access to a universe of opportunities. Robo-advisors will help investors with the small hurdles they face when investing in an ETF and provide support along the way to make sure their clients reach their financial goals.

Silvan Schumacher is co-founder and CEO of Swanest, a UK-based robo-adviser.

Originally published at blog.swanest.com.

Increasing evidence of storytelling and personal enrichment is making people to move from traditional investment funds into Exchange Traded Funds (ETFs). A trend that is shacking up the financial industry.

Recap: The Difference Between Active Funds and ETFs

Most people are aware about mutual funds. This is the preferred investment products as promoted by banks. You put your money into a pot, in which asset managers allocate your investments on a daily basis. Based on their opinions, investments are frequently being re-allocated with the aim to make your money grow faster than the average market, which is usually measured with indices such as the S&P 500. Because asset managers are expensive individuals, the funds are charging high fees to finance their activities.

An ETF simply replicates an index, which the asset managers of the mutual fund is trying to beat. Hence, ETFs aim at benefiting from long-term market growth instead of speculating on individual assets. Due to the limited engagement of the asset managers, these funds are said to be passively managed and come at significantly lower costs.

To illustrate, an average mutual fund may charges 1.5–2 percent management fee, an ETF charges between 0.1–0.4 percent on the total amount invested.

ETFs Beat Actively Managed Funds

There is a wide range of studies comparing the performance of actively- and passively managed funds. All come to the conclusion that actively managed funds do not achieve to beat the market in the long run. Prominent supporters of these findings are:

Charles D. Ellis

… a leading American investment consultant and known for his philosophy of passive investing through index funds, as published in his book “Winning the Loser’s Game.”

Burton G. Malkiel

… an American economist and writer, most famous for his classic finance book “A Random Walk Down Wall Street.”

John C. Bogle

… the founder and retired CEO of The Vanguard Group and known for his 1999 book Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor.

Tony Robbins

Tony Robbins is an American motivational speaker, personal finance instructor, life coach and strong supporter of index investing as highlighted in his book “Money: master the game”.

William F. Sharpe

… an American economist. He is the STANCO 25 Professor of Finance, Emeritus at Stanford University’s Graduate School of Business, and the winner of the 1990 Nobel Memorial Prize in Economic Sciences.

Make Yourself a Better Picture

Instead of relying on the researches of the gentlemen from above, you may make yourself a better picture. Standards & Poor’s is comparing the performance of actively managed funds with their benchmarks twice a year. Following the results for the US market from 2014:

Download complete S&P comparison for US

Download complete S&P comparison for Europe

As you can see, depending on the type, 75–90 percent of the funds underperform their benchmark in the long run. Even worse, those few that outperformed their benchmark in one year, are very unlikely to outperform their benchmark in the next year again. Hence, picking a fund that probably will outperform in the future becomes pure lottery.

Not Enough? More Evidence.

You may sit back and enjoy this documentary from SensibleInvesting about the evidence of index investing:

Passive Investing — The Evidence, Part 1: The Outperformance Myth

Passive Investing — The Evidence, Part 2: The Cost of Investing

Passive Investing — The Evidence, Part 3: A Better Alternative

Passive Investing — The Evidence, Part 4: Ultimate Diversification

Passive Investing — The Evidence, Part 5: A Healthier Way to Invest

Passive Investing — The Evidence, Part 6: Hooked On Active

Passive Investing — The Evidence, Part 7: The Tide Is Turning

Passive Investing, The Evidence — Part 8: The Rational Choice

Visit Swanest →

A lot of ideas might transform into products but do not succeed as they fail to tell the world about their innovations.

Starting a business is half marketing and this is where startups fail. Luckily marketing became cheaper as new concepts such as growth hacking emerged. You might kick of your venture with nothing more than putting on your thinking hat.

However, remembering my times at business school guerrilla marketing seemed to be the holy grail of boosting a business. If I only knew how to do it.

TransferWise seems to master this challenge like no other in the FinTech world. Yesterdays #bath4banks campaign proved their great capabilities in this field. The idea: throwing the city into a giant soap bubble to scrub of the banks’ dirt.

Genius indeed, but going back into past I must admit to like their previous campaigns even more. At halloween TransferWise declared death to hidden fees.

Somehow scary, somehow sexy, but definitely effective. The video got liked almost 72'000 times. My all time favorite is the team walking around London naked to demonstrate that they have nothing to hide.

My great admiration for TransferWise’s marketing department. If you look for a new job give us a call, we will tidy up the wealth management industry.

Visit Swanest →

Originally, money was used to facilitate exchange; it avoided the inconveniences of a pure barter systemin which goods have to be traded against other goods. Money can only become money when a group of people agrees it to be money. Hence, if we accept shells to be a medium of exchange; it shall become money.

In the past it used to have an intrinsic value; may it be the value of a shell or gold. Nowadays, money does not represent intrinsic value anymore; it is only worth the paper it is printed on. Therefore, it is important to maintain a certain scarcity, otherwise people lose faith in it and do not accept it to be money anymore.

Currently, there are three different forms of money; (1) money that is exchanged only between banks, (2) the paper money we hold in our wallets and (3) the money that exists in the form of digits on our bank accounts. The first two forms represent only a small part and are issued by the central banks of states. The last form represents the majority of money and is issued by commercial banks when lending out money. Hence, money is debt and for every €/$/£ in the system someone is paying interests. And because there is never enough money in the system to pay for all the interests, more and more money (or debt) needs to be created; until we might lose faith in it.

It is therefore why investing is a good thing. It allows us to attach real value to money. We ultimately hold tiny parts of companies that produce goods and services for the society.

However, it does not solve the underlying problem of our monetary system. This challenge is a little bit bigger. To solve it, we need to understand money. I therefore encourage everyone to dig into that topic. As a starting point I propose you to consider the initiative PositiveMoney. It addresses the problem of the current system and proposes an alternative; thoughts worth thinking about.