Table of Contents
A lot goes into making a single better portfolio. So much that we are spreading this performance of our investment team’s work in three parts.
In Part 1, we find out how we allocate the investment of customers at a higher level, and in Part 3, we show that we handle thousands of trades each day to keep our portfolio lukewarm.
And here in Part 2, we zoom in a subject that can be a bit more reliable for everyday investor: choosing the real investment itself. If the asset allocation is like refining a recipe, then the theme of today’s fund selection is about the source of high quality, low -cost material.
And for that, we turn our eye towards another type of market.
Josh Shireer specializes in shopping capital markets in Butterment, raising funds that fill the relevant allocation of your portfolio. His work line looked a little different decades ago, when his half -father was working as a businessman on Wall Street. Subsequently, this level of paying attention to portfolio construction and selection of funds was usually only in the service of ultra rich. But now, Josh and team navigate the rapid expansion universe from everyday investors.
Why shopping for funds is not always so simple
On the one hand, the recent explosion of investment options has been very good for investors. Increased competition reduces costs and opens out access to new, more niche markets.
But more options also leads to more complexity. Exchange traded funds (ETF), thanks to our favorite building blocks for portfolio, thanks to their transparency, tax efficiency and low cost. They bundle hundreds of individual stocks and bonds, and sometimes thousands. But even ETFs are multiplying rapidly. In 2024 alone, 723 new people launched, in total around 4,000.
To portray this abundance, suppose your asset allocation has called to serve the “large cap” shares, which means that companies are priced at $ 10 billion or more. Around 500 ETFs populate this particular corner of the universe. We can take the group below 30, which we are seeing, such as we call a list or “index” of 500 of the largest cap companies, or S&P 500, the largest American companies. But hard work is rarely done.
Some ETFs that track S&P500 followed it honestly, while others put their spin on it, which can open investors to unexpected exposure.
Josh Shire (from left to second) helps to navigate the rapid expanded universe of ETF on behalf of customers.
As importantly, their cost is at all places, and high fees can destroy your returns in a long time. This is why the SpDR fund is currently the primary way to get us large cap stock exposure in the primary way of our main portfolio. It provides both for low cost (0.02%) and low cost for business (0.03%at the time of writing), both for low overall cost of ownership.
“Shopping for investment is like buying a car,” Josh says. “The total cost is more than the sticker price.”
How do we calculate the cost of ownership
Part of our role as a fiduciary, someone who is legally bound to act in the best interests of its customers, is conducting deep and fair evaluation of ETFs used in our portfolio. Josh and the use of the team are completely “open architecture”, which means that we are not obliged to use money from a particular provider. Instead, we try to choose the most optimal people in terms of cost and risk.
It helps Bettlement itself does not make funds, manages and sells, meaning that we avoid the underlying conflict of the interests facing some advisors when they also act as fund managers. These firms can be wooed to move customers to their own funds, even when a better option exists.
So we are proud of proper hard work behind our fund selection, and it begins with our “cost of ownership” scoring functioning. It is the factor in the two types of costs mentioned earlier: the cost for “hold” or a fund, also known as its expense ratio, and the cost of trading it.
As you will see in Part 3 of this series, a portfolio is hardly stable. Let’s come in deposits. The withdrawal goes out. Rebalansing occurs regularly.
All this requires daily trading, so the cost of those transactions matters to the lower line of your investment. Cost-to-trades are also known as “dialect-back spread” or markup, which traders are expected to sell when selling a share. This is how they earn money, and similar to wholesale vendors and retailers like costco, the larger the fund is, the smaller margin by living with a merchant.
The search for these price buyers is that we are capable of distributing diverse portfolio globally at a fraction of the cost of options on the market today. And we never shopped. Our favorite funds are updated several times throughout the year.
Primed for purchase
There is a lot for our fund selection method, especially for funds that are not bound by a specific index, but are made of scratches instead. Some fund managers such as Goldman Sachs, where Josh worked earlier in his career, also mix both attitudes into a “smart beta” strategy. We provide such a portfolio with our better-made collections.
But for this series, let’s show off for a moment that our tot bags are filled, and we are ready to check out. This is the time to meet the team behind every transaction in betterment.
