Ellevest

Magazine

The Tough Standards Behind Our Funds

By Sylvia Kwan

“Passive” sounds negative, right? Passive-aggressive coworkers, the dreaded passive voice in writing, passive victims of circumstance. But passive investments are our favorites.

The Tough Standards Behind Our Funds

When people talk about passive investments, they’re usually talking about passive funds. A fund is a set of individual investments that have been put together into one big basket — then investors can buy shares of that whole basket. It’s a way to buy many different types of investments at once — aka “diversify” your investment portfolio, which can help make it less risky.

So, what’s a passive fund?

A passive fund is built to essentially run on its own. A fund manager makes some rules about what kinds of investments to include, uses those rules to build the fund, and then — passively — lets it do its thing.

Passive funds are designed to match the performance of a market “benchmark” — basically, something you can monitor the performance of, like the S&P 500, or a certain industry overall, or a set of companies that are all a similar size. The benchmark is what guides the rules for which investments to include in the fund — not whether an investment seems like a winner, or because the fund manager just ~likes it.~

The opposite of a passive fund is an active fund. Active fund managers are paid to pick, choose and swap out the securities in the fund in order to try to beat a market benchmark. (Bad news for those people: Active investments haven’t performed as well as passive investments, historically. Whoops.)

At Ellevest, we invest in passive exchange-traded funds (ETFs) and, if you choose to use our Ellevest Impact Portfolios, a few mutual funds that are designed to have a positive impact for women (more on that later). ETFs and mutual funds are pretty similar, except that shares of ETFs trade on an exchange like stocks, which makes it easier and cheaper to buy and sell them. ETFs also tend to have lower fees.

How Ellevest builds your investment portfolio

Here’s how using Ellevest’s online investing platform works: You tell us a little bit about yourself and your money goals, including how long until you want to hit each one. You also decide whether you want to invest with our “core” portfolios, which are made up of ETFs only, or Ellevest Impact Portfolios, which are a mix of ETFs and mutual funds.

Once we have that info, we can build a custom investment portfolio for each of your goals. First, we determine what percentage of stocks vs bonds — aka your asset allocation — is right for your goal and timeline. Then we choose specific funds that will add up to that target allocation.

Together, the low-cost, tax-efficient funds we use at Ellevest allow us to include any of the following 21 asset classes when we build your portfolio. That’s more asset classes than some other digital advisors use, but we believe the extra ones can make a portfolio more diversified and help protect against inflation (you can read more about that here).

Ellevest's Asset Classes

Here’s the fun part (well, we think it’s fun): Ellevest doesn’t use just one fund for each of these asset classes. Instead, some of our funds span multiple asset classes — which can be super useful.

For example, let’s say we wanted to put a certain percentage of your portfolio in one specific asset class — maybe US Large Cap Value. We might pick one low-cost fund that’s made up of several different asset classes (including US Large Cap Value), and then pair it with a smaller amount of a fund that’s made up of only US Large Cap Value. Together, they would get you to that total target percentage.

Doing this lets us build the portfolio that’s right for your goal — but at a potentially lower cost.

We only pick funds that meet our high standards

We didn’t choose the funds we use just because. We determined what kinds of funds would best serve your best interests, and then we only picked funds that met those standards.

Fund management fees

One reason why investors like ETFs is that they’re relatively inexpensive. On average, mutual funds charge between 0.55% and 0.76% of a client’s assets invested in the fund. Our ETFs’ management fees, on the other hand, range from 0.04% to 0.20%.*

Still, investors sometimes have to branch out from ETFs in order to get the asset classes or investing strategies they want. For example, Ellevest Impact Portfolios are built to seek financial returns and social impact by advancing women, but we haven’t been able to do that with ETFs alone.

So we do include some mutual funds in our Impact portfolios, but we’re still focused on balancing your preference for impact investing with costs — our mutual funds charge an average of 0.56%, but once we combine them with ETFs in your larger portfolio, your overall, blended fund fees will fall between 0.13% and 0.19%** (way below that average for mutual funds).

Total costs

Management fees aren’t the only thing to consider. We also look at the total cost associated with owning shares of a fund — because going with the “cheapest” option doesn’t necessarily mean that it will end up being cost-effective (or best) for your portfolio.

Other things that affect total costs include:

  • The average number of shares of the fund traded every day ... because supply and demand can affect how much you pay for them.

  • The difference between the market purchase price and the market selling price (aka the bid/ask spread) ... because the “bid” tends to be lower than the “ask,” and the bigger that difference is, the more your fund has to earn back before you’re even on your original investment.

  • How closely the fund matches its underlying benchmark (aka the tracking error) ... because if the fund doesn’t earn as much as it was expected to compared to that benchmark, your shares will earn less than expected, too.

We also choose ETFs that offer high liquidity, meaning they’re easily bought and sold. That comes in handy when you’re withdrawing money or when we rebalance your portfolio, and it also helps keep the total costs associated with holding the ETF low (because liquidity has an effect on those other factors we mentioned above).

And finally, we look for ETFs that add a good amount of diversification to your portfolio. Because funds are baskets of many different investments, they’ll already do that better than an individual stock or bond. But we choose ETFs that are especially diversified inside themselves — so that’s diversification on top of your diversification.

Never not improving

The markets and the universe of available investments are always changing … but our standards for picking funds don’t. Our goal is always to serve your best interests by keeping costs low wherever possible, helping you invest for your values if you want to, and continuously improving the forecasts we show you (because we know you use those projections to plan your future — talk about important).

So, yes, our investments are mostly passive — but our portfolio management and investment selection isn’t. We know your goals are important, and we want to do whatever we can to help you reach them.


Disclosures

These fund fees are separate from Ellevest’s Annual advisory fee. Once they are combined into a client's portfolio, the blended fund fees for core portfolios will range from 0.05% to 0.10% per year. Ellevest charges no fees for clients’ emergency funds.

These fund fees are separate from Ellevest’s Annual advisory fee. Once they are combined into a client's portfolio, the blended fund fees for Ellevest Impact Portfolios will range from 0.13% to 0.19% per year. Ellevest charges no fees for clients’ emergency funds.

© 2019 Ellevest, Inc. All Rights Reserved.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.

Money is power.
Invest like a woman.

We create personalized investment portfolios based on your finances and a gender-specific salary curve. Get started: Open an account today.

Start Investing
Sylvia Kwan

Sylvia is the Chief Investment Officer of Ellevest. She researches and oversees Ellevest portfolios and develops the algorithms behind Ellevest’s investment recommendations.