Asset Allocation portfolios

Interactive Brokers Asset Management offers several diversified portfolios that are dialed up or down for risk, offer good diversification across different asset classes, and attain this diversification by investing in low-cost, liquid ETFs.

We offer Asset Allocation portfolios with three levels of risk and variants for regular and retirement accounts.

Regular:
IRA:
Select a holding from the pie chart to see its description
This asset class has zero allocation in this portfolio

It’s all about diversification Interactive Brokers Asset Allocation

While there is no such thing as a free lunch, risk reduction through diversification is as close as it gets.

Diversification is about buying a basket of securities that tend to do well (or poorly) at different times and under different economic conditions. Being thoughtful about how much capital to allocate to each of these securities can result in far more consistent returns than concentrating all capital (and risk) in a single security or asset class. These portfolios are diversified across multiple asset classes, including stocks, bonds, and inflation-hedging securities like Real Estate Investment Trusts. The capital allocation to each of these asset classes is dialed up or down depending on the desired risk level. When these asset classes are combined together intelligently in a portfolio they can provide income, growth, and stability during different economic conditions.

Traditionally, it is well accepted in the industry that:

Our allocation Our allocation

Our portfolios allocate capital to an equity component, a bond component and an inflation-hedging component. Together these deliver good diversification, which leads to risk reduction and return stability.

The capital allocation to each of these asset classes is dialed up or down depending on the targeted risk level. Clients fill out a risk questionnaire, and receive a recommended portfolio based on their responses to that risk.

Capital allocation is based on a blend of art and science. Having too much reliance on historical data is dangerous. During periods of crisis like 2008, we saw that historical correlations broke down and asset classes started moving in tandem. While several firms use statistical techniques like mean-variance optimization to determine portfolio weights, we do not. We have found that these portfolio weights tend to be highly sensitive to inputs, unstable and often result in highly concentrated, high turnover portfolios.

Instead we use a approach that is guided by the Black-Litterman approach to portfolio construction. The baseline scenario is that a passive investor holds the Global Market Portfolio (GMP) in the absence of overriding views or predictions. The global portfolio is determined by the aggregated global capital (see figure 2) allocated to these asset classes as a starting point for the portfolio allocations. This allocation represents how important these asset classes are in meeting the financial objectives of a passive investor.

Equity component

How we build the equity component

Exposure to US stocks is obtained through the purchase of Large (VTI), Dividend (DVY), Mid (VO) and Small (VB) stocks, using best-of-class ETFs, factoring in both management fees and liquidity. Broad market indices like VTI are cap-weighted indices concentrated in mega-cap and large-cap names. To reduce this size concentration risk, we also include small and mid-cap ETFs. We include Dividend stocks since they provide exposure to both income and growth.

Exposure to Developed Market stocks and Emerging Market stocks is obtained through the purchase of VEA (for Developed Markets) and VWO (for Emerging Markets).

Bond component

How we build the bond component

Bonds have an important role in any asset allocation portfolio since they provide stable income, have low relative volatility and provide a useful hedge against market downturns. That being said, they do carry interest rate risk, and prices may go down when there are unexpected changes in rates.

These portfolios’ exposure to bonds is built using multiple ETFs. They include low-yielding government bonds (BND), investment-grade (LQD) and high-yielding corporate (HYG) bonds, tax-sensitive municipal bonds (TFI), inflation-protected (TIP) and international (BNDX) bonds. Muni bonds are included since interest income from municipal bonds is exempt from federal taxes, so they are attractive to clients who are in high-tax brackets. High-yield bonds can be a source of attractive yield, especially in a low interest rate environment. Including International bonds adds additional diversification.

Inflation hedging component

How we build the inflation hedging component

Exposure to Commodities and Real Estate is through the purchase of VDE (for exposure to Energy stocks) and VWO (for exposure to US Real estate). We choose VDE as opposed to an energy-heavy commodity Exchange-Traded Products (“ETPs”) like GSG since these ETPs results in the generation of Schedule K-1 which has complex tax implications. We also allocate capital to inflation-protected bonds (TIPS). These asset classes tend to provide protection during inflationary periods, and are an important part of a diversified portfolio.

Final allocations

Final allocations depend on the targeted level of risk, as well as on whether the capital is held in a tax-advantaged account like an IRA.

What makes our Asset Allocation portfolios different?

The Asset Allocation portfolios allow customers to get exposure to a diversified multi-asset portfolio at low cost. The tables below compare the management fees and portfolio composition of the Asset Allocation portfolios to selected offerings from competing robo advisors.

Low management fees

Interactive Brokers Asset Management
0.09%
This fee does not include commissions separately charged by our affiliated broker-dealer, Interactive Brokers LLC. The minimum required investment is $5,000.
Wealthfront
0% - 0.25%
These fees include commissions costs. No fees apply for the first $10,000 of investments. The minimum required investment is $500. Tax loss harvesting is included in these fees. How much does Wealthfront charge for its service
Betterment
0.25% - 0.40%
These fees include commissions costs. The 0.25% fee level does not require a minimum investment. The 0.40% fee level requires a $100,000 minimum investment and gives investors unlimited access to a certified financial planner network. Tax loss harvesting is included in these fees. Betterment pricing
Fidelity Go
0.35%
These fees include commissions costs. The minimum required investment is $5,000. Pricing - Fidelity Go
Vanguard Personal Advisor Services
0.30%
These fees include access to a Vanguard Personal Advisor Services adviser, a customized financial plan and ongoing investment advice. Financial advisor fees

Please note that, in addition to the above fees, investors in any of these types of portfolios will incur fees charged by the issuers of the ETFs making up these portfolios.

Diversified asset allocation

By accessing a wider and more granular range our Asset Allocation portfolios provide diversification both across and within asset classes:

    Stocks:
  • Market-capitalization: Large, Mid and Small cap stocks
  • Geography: US, Developed and Emerging market stocks
  • Income generation: Dividend stocks
    Bonds:
  • Geography: US and International bonds
  • Issuer: Government, Municipal and Corporate debt
  • Quality: High-grade and Low-grade debt
    Inflation-hedging securities:
  • Security types: Real Estate Investment Trusts, Treasury Inflation-Protected Securities and Energy Resources

Interactive Brokers Asset Management
Good diversification across and within asset classes
Wealthfront
International bonds
Betterment
Real estate
Energy
Fidelity Go
Dividend stocks
Emerging market stocks
Real estate
Energy
Corporate bonds
High-yield bonds
Vanguard Personal Advisor Services
Portfolio composition not available.

The red font and the x mark indicate an asset class not represented in a given competitor’s asset allocation portfolio.

Please note that some of these competing offerings may offer exposure to instruments other than ETFs, such as mutual funds. Additionally, some of these competing offerings may also include other ETFs than those included in our Asset Allocation portfolios.

Fractional shares

Using fractional shares of ETFs, our Asset Allocation portfolios leads to better capital allocation and keep cash holdings at a low level. The table below illustrates which asset allocation portfolios make use of fractional shares.

Interactive Brokers Asset Management
Yes
Wealthfront
No
Betterment
Yes
Fidelity Go
No
Vanguard Personal Advisor Services
No

Important information

We have not attempted to survey the entire industry for similar portfolio offerings and have selected for comparison purposes some of the most publicized competing offerings. There may be other offerings available on the U.S. market that we have not analyzed or listed below that may offer similar (or maybe broader) asset exposure and features at similar or even lower costs.

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Important information

  1. Nothing on this page should be construed as a solicitation or offer or recommendation to buy or sell any security or as an attempt to provide any investment advice. Investment advice is only provided to investors who become clients pursuant to an investment management agreement. Covestor Ltd is an investment adviser registered with the Securities and Exchange Commission, doing business as Interactive Brokers Asset Management (“IB Asset Management”).
  2. Diversification of assets (which IB Asset Management uses to reduce the risk of investment in these portfolios) does not ensure a profit or protect against investment loss. All investments, including those in these portfolios, involve the risk of loss, including possible loss of the money invested and a reduction in earnings. Market fluctuations and other factors may cause decreases in the value of client accounts invested in these portfolios. IB Asset Management does not guarantee that any particular asset allocation portfolio will meet a given client’s investment objective or provide a client with a specified level of income. Past performance is no guarantee of future returns. These portfolios mainly invest in ETFs and stocks and may not be suitable for all investors. Clients may lose all or part of their investments in these portfolios.
  3. Detailed information on the asset class risks, conflicts of interest, applicable brokerage commissions, fractional shares, and limitations on investments and divestments associated with these portfolios (along with IB Asset Management’s full disclosures) is provided here and on the Forms and Agreements page. Additional information on the performance, composition and construction process for these portfolios may be found on each Asset Allocation portfolio page.
  4. IB Asset Management’s Asset Allocation portfolios are made up of whole and/or fractional holdings of ETFs and in certain cases, individual stocks. They are not ETFs or Mutual Funds. Clients choosing to invest in these portfolios directly own the individual stocks and/or ETF shares making up these portfolios.
  5. IB Asset Management manages these portfolios by trading its own funds and replicating this trading in the accounts of investing clients. Clients may restrict any of the stocks or ETFs traded in their account but should note that any restrictions they place on their investments could affect the performance of their account leading it to perform differently, i.e., worse or better, than IB Asset Management’s account managing the portfolio or other client accounts invested in the same portfolio.