Five online wealth managers are pitted against each other as Selin Bucak invests money and compares their services. Nutmeg, Moola, Wealthify, Moneyfarm and newcomer Wealthsimple have all put her in different risk buckets, from cautious to adventurous. Here, she chronicles her experiences.
‘I think the elephant in the room is the corporate bond market and whether, in fact, encouraging investors to buy ETFs linked to the high yield market and the low quality end of bond market is really fool’s gold.’
This is a warning from Sarasin & Partners CIO Guy Monson, who recently visited Citywire for a roundtable discussion.
The issues surrounding fixed income ETFs, particularly liquidity, have been highlighted by a number of active managers over the years. This year marks the 15th anniversary of the first fixed income ETF, but despite the market’s increased maturity, concerns remain. So this got me thinking, how are my robo-advisers using fixed income ETFs?
This led me to an interesting discovery. While four out of five of the companies I am invested with use regular ETFs for my fixed income exposure, one company stood out: Wealthsimple.
All of the funds on Wealthsimple are index-based, however for the high yield exposure the firm uses the Pimco Global High Yield Bonds fund. For a low cost proposition, this might seem counterintuitive, to use an active fund which usually has a fee of 0.8% (much higher than an ETF). However, with Wealthsimple I am able to access the fund at a 0.55% annual management fee, normally offered to institutional investors.
Naturally I asked Wealthsimple why it decided to use an active fund. I was told that the diversification benefits of the fund warrants its inclusion in the portfolio and while it continues to look for lower cost pure index-based solutions, at the moment this is the best option.
Aside from Wealthsimple, the only other robos that have me invested in high yield are Moola (cautious portfolio) and Moneyfarm (aggressive portfolio). They both use the iShares Global High Yield Corp Bond GBP Hedged Ucits ETF, which has returned 12.58% over three years.
One concern in the high yield market is that around $1 trillion (£758 million) of US high yield debt is due to mature by 2021, which will create a wall of new issuance, according to Moody’s. Citywire’s head of investment research Frank Talbot believes that in such an environment, Wealthsimple’s decision makes sense.
He said: ‘There is a lot of anxiety around high yield corporate bond ETFs. Products which offer daily liquidity for an illiquid market may struggle to meet redemptions when volatility spikes. With rates finally rising across the globe, and half of the US high yield market coming to maturity in the coming years, refinancing will start to become more problematic and that could be the trigger for that volatility.’
Talbot added: ‘Wealthsimple’s strategy of using an active manager in this space is an interesting one – the quality of some parts of the market is questionable and an active fund should outperform during a bad patch.’
Derek Fulton, CEO of First Trust Global Portfolios, provided an interesting point of view on the issue. He thinks about the ETF structure as a wrapper around fixed income, and not a purely passive option, which makes sense.
While admitting that if everyone decided to sell, there could be issues, he also highlighted that if that was the case, active funds would also have problems, not just ETFs. Also, according to data from BlackRock, while bond ETFs are expected to be a $1.5 trillion market by 2022, currently they have $749.1 billion in assets.
While I would not want my robo advisers to blindly increase my allocation to high yield ETFs in an effort to outperform and increase income, I am comfortable with my current spread and especially impressed to find out that Wealthsimple is prepared to go active if it feels it is in the best interest of the client.
Fixed income allocation across portfolios:
• iShares GBP Ultrashort Bond Ucits ETF
• iShares GBP Index-Linked Gilts Ucits ETF
• iShares GBP Corp Bond 0-5 year Ucits ETF
• iShares Global High Yield Corp Bond GBP Hedged Ucits ETF
• iShares UK Gilts 0-5 year Ucits ETF
• iShares Core UK Gilts Ucits ETF
• iShares JP Morgan USD EM Bond Ucits ETF
• Pimco Global High Yield Bond
• L&G Emerging Market Government Bond Index fund
• iShares Corporate Bond Index fund
• iShares UK Gilts All Stocks Index fund
• iShares GBP Corporate Bond 1-5 year Ucits ETF
• Lyxor FTSE Actuaries UK Gilts Ucits ETF
• Lyxor FTSE Actuaries UK Gilts 0-5Y Ucits ETF
• iShares GBP Ultrashort Bond Ucits ETF
• Pimco Sterling Short Maturity Source Ucits ETF
• iShares Core GBP Corporate Bond Ucits ETF
• Db x-trackers Global Government Bond Ucits ETF
• SPDR Barclays Emerging Markets Local Bond Ucits ETF
• iShares Global High Yield Corp Bond Ucits ETF
• iShares Ultra Short Bond Ucits ETF
• Vanguard UK Inflation Linked Bond Index fund
• L&G Global Inflation Linked Bond Index fund
• iShares Corporate Bond 1 to 10 Year Ucits ETF
• L&G Short Dated Sterling Corporate Bond Index fund
• Vanguard UK Government Bond Index fund