Portfolio automation (also known as automated investing) is a service offered by online platforms that builds and manages investment portfolios automatically through sophisticated computer algorithms.
Individual investors signing up for an automated investment service typically start by completing a questionnaire designed to assess their investment goals and risk tolerance. The platform then takes this information and assembles a variety of different portfolios containing different types and quantities of exchange-traded funds (ETFs). More aggressive portfolios will contain a greater percentage of stock ETFs, and more conservative portfolios will contain a greater percentage of bond ETFs.
ETFs are the dominant investment vehicle underlying automated portfolios because of their diversification, liquidity, and low fees. Once the investor selects a portfolio, the platform typically automates much of the portfolio management process through periodic, automatic portfolio rebalancing, which realigns the portfolio’s original asset weights.
Why Automate a Portfolio?
Automated investing is becoming an increasingly popular way to access the market because of the low cost and convenience offered in comparison to traditional portfolio management services.
Traditional financial advisors typically charge their clients about 1% of assets under management annually, and these fee arrangements typically require asset minimums. Automated investing services, on the other hand, typically charge about 0.25% annually, and asset minimums are low or nonexistent. Companies offering automated portfolio management cost less because they use intelligent automation to build and passively manage portfolios. As a cost-saving solution, automation is attractive to many investors, especially those who are young or just beginning their investment journey. Advisory firms are also taking note, and are increasingly integrating automation as a way to attract young investors and build client loyalty.
Convenience is another major reason automated investing has become so popular in recent years.
Many investors and their advisors do not have the time to exhaustively research the countless, confusing products crowding the investment marketplace. Automated investing is enormously beneficial for many investors because it streamlines and automates the investing process. Instead of worrying about timing the market or following every snippet of financial news, investors who automate benefit from portfolios that automatically rebalance without prompting and without the threat of human emotion driving irrational decision-making.
Why ETFs?
ETFs are the dominant investment vehicle underlying automated portfolios because they offer numerous advantages, including diversification, liquidity, and low fees. ETFs hold multiple, varying underlying assets that typically follow major stock indexes (the SPDR S&P 500 ETF Trust (SPY) tracks the S&P 500) or specific industries (the iShares U.S. Medical Devices ETF (IHI) tracks U.S. companies that manufacture and distribute medical devices).
With multiple assets underlying the fund, ETFs provide investors with a measure of diversification as one asset’s poor performance will not sink the fund. In addition, ETFs give investors broad exposure to a market or industry without having to take the risk of holding an individual company’s stock. Plus, they offer:
Liquidity
Although composed of multiple underlying assets, ETFs trade like stock; they are listed on exchanges and traded throughout the day as prices fluctuate. The relative ease with which ETFs trade makes automating portfolio creation and rebalancing simpler and more cost-effective.
Low fees
ETFs offer much lower expense ratios than actively managed funds. Since management fees are an ongoing expense and proportional to investment size, ETFs offer investors a comparatively low cost, low risk way to track market performance.
Diversification
ETFs are an especially advantageous investment vehicle during times of intense, prolonged market volatility because they offer investors broad and diverse exposure while moderating risk and keeping fees to a minimum.
How Magnifi Helps Advisors Automate ETF Portfolios
Choosing the right automated investing platform is key to maximizing your portfolio’s success. Investors and financial advisors are increasingly integrating intelligent automation to save time and money, and the best platforms make automating a breeze with customizable tools and exceptional user experience.
Magnifi offers smart, personalized solutions for investors and financial advisors interested in the potential of portfolio automation. Users can easily create a new portfolio by setting target allocation weights and management preferences, and Magnifi’s intelligent automation handles the day-in day-out portfolio management. Users can also upload an existing portfolio and the platform’s powerful search and compare tools quickly analyze it and suggest changes to improve asset allocation and performance.
This feature is extremely valuable to financial advisors because it streamlines portfolio optimization and reduces response time when clients have questions about their portfolio’s performance. Sustained market volatility is encouraging investors and advisors to find ways to maximize performance while mitigating risk, and portfolio automation offers an intelligent solution in uncertain times. Magnifi makes automating simple, and the platform’s powerful technology provides users with a distinct advantage as they navigate the turbulent market.
Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Try it for yourself today.
This blog is sponsored by Magnifi. The information and data are as of the publish date unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.]
