Robo-advisor Wealthfront’s latest automated portfolio invests clients exclusively in bonds.
The Automated Bond Portfolio uses a mix of Treasury and corporate bond exchange-traded funds to provide a higher yield and more liquidity than the fixed-income products retail investors can typically access, such as certificates of deposit, I-bonds or Treasury bills. Based on weighted average of the 30-day SEC yields for each ETF in the portfolio, Wealthfront says the portfolio can achieve an annual return of 5.48% after the robo-advisor’s 0.25% fee. The portfolio requires a minimum $500 investment.
Clients have been asking Wealthfront for a product that recommends an allocation of bond ETFs based on their income, state of residence and tax filing status to provide maximum after-tax yield, said Dave Myszewski, vice president of product at Wealthfront.
“Clients have been requesting an easier entry into bonds that helps them take advantage of the higher yields and lower risk without having to navigate a clunky interface or sacrifice liquidity,” Myszewski said in a statement.
Many young investors, the group that Wealthfront has traditionally catered to, are witnessing the first attractive bond market in their lifetime thanks to higher federal interest rates, and are eager to take advantage of that, according to the company. Fixed-income investments accounted for nearly half of the top 25 securities purchased in Wealthfront clients’ held-away accounts during the first quarter, a 130% increase over the fourth quarter of 2022.
The data are in line with larger industry trends. Roughly $200 billion flowed into bond ETFs in 2022, and the funds brought in more than $28 billion in March alone, according to Morningstar.
And more than 85% of fixed-income assets started to pay out more than 4% in interest for the first time since 2007, according to The Wall Street Journal, citing data from BlackRock. However, many retail investors still struggle to understand and access bond markets.
Wealthfront isn't the only company looking to improve digital access to the bond market. For example, LTX, a subsidiary of Broadridge Financial Solutions Inc., recently launched BondGPT, an artificial intelligence-powered engine that aims to simplify workflows for investors navigating the bond market.
Betterment, a direct competitor to Wealthfront in the digital advice market, also offers a bond portfolio called BlackRock Target Income. However, with exposures to high-yield corporate bonds that offer higher yields but carry lower credit ratings, it is not as conservative as Wealthfront’s portfolio, said David Goldstone, manager of investment research at Condor Capital, which publishes a quarterly Robo Report based on accounts the firm has opened at dozens of digital investment advisors.
A Betterment spokesperson confirmed that the company "has offered managed bond portfolios across multiple types and maturities for years," but didn't offer additional comment.
Wealthfront began with automated managed accounts featuring a blend of equities and fixed income based on an investor’s responses to a risk tolerance questionnaire, which it advertised as a more intelligent alternative to do-it-yourself stock picking. The company has expanded its product set over time to include lending, cash management, cryptocurrency, direct indexing and even individual stocks.
The Silicon Valley robo-advisor manages $23 billion in assets, according to its most recently filed form ADV, and oversees $43 billion across its platform, according to the company.
Wealthfront’s most conservative portfolios allocated approximately 70% to bonds, Goldstone said. These new portfolios primarily consist of short-term Treasuries, effectively offering a higher-yielding alternative to Wealtfront cash accounts but with less risk than a conservative investing portfolio, he said.
Wealthfront has consistently been one of the best-performing robo-advisors in Goldstone's Robo Report during the recent market volatility, as well as over a five-year period. However, these new products could cause confusion among customers who came to Wealthfront for advice on where to put their money.
“Is [the bond portfolio] meant to be a home for an emergency reserve or to park savings for a near-term goal? And, if so, why not put this money in their high-yield cash account?” Goldstone said in an email. “Offering different products to fit different investor desires makes sense but it runs the risk of over-complicating the messaging. The simplicity and ease of Wealthfront is one of its strongest suits, and this bond portfolio may muddle that simplicity.”
Wealthfront did not respond to a request for comment.
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