What Investors Can Learn from Robo-Advisors' International Exposure

A Look at the International Exposure of Robo-Advisors

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Robo-advisors are expected to manage upwards of $2.2 trillion in five years, according to the consulting firm A.T. Kearney, which represents a 68% annual growth rate. By automatically investing and rebalancing according to a client’s goals and risk tolerance, Betterment, Wealthfront, and other robo-advisors aim to automate the investment process for individual investors, while minimizing the fees traditionally paid to human financial advisors.

The portfolios generated by robo-advisors often include significant international investment exposure through low-cost exchange-traded funds (ETFs).

Betterment

Betterment is one of the largest robo-advisor with more than $3 billion in assets under management. Unlike some of its competitors, the company’s portfolios typically include exposure to international and emerging market bonds rather than just equities.

A sample portfolio that’s invested 90% in stocks and 10% in bonds includes several international ETFs:

The total exposure for a 90/10 portfolio would amount to over 50%, which is significantly higher exposure than many domestic self-directed investors have in their portfolios.

Wealthfront

Wealthfront is the second most popular robo-advisor with over $2 billion in assets under management.

Rather than including emerging market bond exposure, the company’s portfolios are focused primarily on equities and build in exposure to things like natural resources.

A sample portfolio with a risk tolerance of 8.5 includes several international ETFs:

  • Developed Markets (VEA) – 24%
  • Emerging Markets (VWO) – 18%

    The total exposure for an 8.5 risk tolerance portfolio amounts to 42%, which is higher exposure than many self-directed portfolios, but potentially less than Betterment.

    Schwab Intelligent Portfolios

    Schwab is a major player in the traditional financial advisory space and launched its own robo-advisor into the market to compete with Betterment and Wealthfront. Unlike its competitors, Schwab includes a diverse range of securities in its international holdings.

    A sample portfolio with 69% equity exposure and 17% fixed income exposure includes several different international ETFs:

    • International Developed Large Company Stocks – 14%
    • International Developed Small Company Stocks – 9%
    • International Emerging Market Stocks – 10%
    • International REITs – 2%
    • International Emerging Market Bonds – 9%

    The total exposure amounts to roughly 44% exposure, which is higher than self-directed investors and falls in between other robo-advisors.

    Mimicking the Exposure

    Self-directed investors may want to take a cue from these robo-advisors when constructing their own portfolios. Since many of these services use low-cost ETFs, investors can even purchase the same securities for their own portfolios.

    For riskier portfolios, the general rule seems to be to include between 25% and 40% exposure to global developed markets, which include countries in Europe, Australia, and Japan.

    Alongside this exposure, these services include between 10% and 20% exposure to emerging markets, which include newly developing economies like Brazil, Russia, India, and China. These markets have higher growth rates, but tend to be more volatile than developed markets.

    Less risky portfolios tend to have less exposure to riskier emerging markets and perhaps a little less overall equity exposure, but diversification into global developed markets remains an important part of these portfolios. This is because global market capitalization is increasingly being spread around the world rather than being concentrated inside of the United States.

    Finally, some robo-advisors include exposure to international bonds and emerging market bonds as a part of the fixed income portfolio. Other portfolios include exposure to natural resources, which may represent some of the same risk exposure as international securities.

    Key Takeaway Points

    • Many robo-advisors have more international exposure than self-directed investors tend to include in their portfolios.
    • Self-directed investors can take a cue from these automated advisors when building their own portfolios and deciding on allocations.
    • Riskier portfolios tend to include between 40% and 50% exposure, while less risky portfolios tend to have slightly less exposure, especially to emerging markets.