Recently, I did a review of the Acorns app. If you are not already familiar with the Acorns savings and investing app, you should read that for an introduction to using Acorns first.
Are Acorns Investments Good Portfolios?
The idea of the Acorns automatic money savings app is that it rounds up all of your transactions and automatically invests that money for you. There are some nuances about how Acorns works you should understand first. Money is only transferred once the amount of the round-ups is at least $5, and only happens once per day.
Before we get too in-depth here, it is important to remember a few things. First, when you get started with Acorns, we are talking about a very small amount of money. That means that as far as real dollar amounts go, the difference in percentages won’t be big. For example, if you have $100 in your Acorns account the difference between 10 percent and 8 percent (whether up or down) is just $2. In other words, this not something to wring your hands over, especially in the beginning.
Where Does Acorns Invest Money?
Of course, the whole point is for your automatic savings to add up and grow over time, so it is necessary to understand where Acorns is investing our money. So, let’s take a look.
Acorns has five different portfolios that it uses and automatically re-balances for all users. This is a typical robo-advisor setup. The Acorns app helps you pick which portfolio based on various risk tolerance questions, or you pick yourself. The five portfolio types are very traditional, even if what is in them is not. The five Acorns portfolios are Conservative, Moderately Conservative, Moderate, Moderately Aggressive, and Aggressive.
These portfolios are pretty typical as far as the stock to bond ratio is concerned.
- Aggressive Portfolio – 90% stocks / 10% bonds
- Moderately Aggressive Portfolio – 75 / 25
- Moderate Portfolio – 60 / 40
- Moderately Conservative – 50 /50
- Conservative 40 / 60
What Investment Does Acorns Use
One of the interesting things about Acorns investment strategies is that all five portfolios use the same six investments. All the investments are index-based Exchange Traded Funds, or ETFs. All six ETFs are regular, publicly traded ETFs. They are not specific to Acorns. In other words, you can look up the prospectus, history, and ticker symbol on any finance website or tool you like.
The six Acorns ETFs are (Name, Ticker Symbol, Discussion):
- Vanguard S&P 500 ETF – VOO – The bread and butter of stock investing, this is an index-based ETF that attempts to replicate the SP500 index by investing in large U.S. companies.
- Vanguard Small-Cap ETF – VB – This is the small-cap stock ETF for Acorns. It invests in small U.S. companies. Specifically, it is designed to track the CRSP US Small Cap Index.
- Vanguard FTSE Emerging Markets ETF – VWO – This is the international component of the portfolio. Specifically, this portfolio invests in a “sampling” of companies based in so-called emerging markets. The largest investments are in China, Taiwan, Brazil, India, and South Africa.
- Vanguard REIT ETF – VNQ – This fund invests in Real Estate Investment Trusts, or REITs, and is designed to track the MSCI US REIT Index. A REIT is a way to invest in the real estate market through stocks. So, assuming everything goes according to plan, REITs would go up when real estate is going up, and vice versa.
- iShares 1-3 Year Treasury Bond ETF – SHY – This is the low-risk investment in the line-up. Nothing lowers your risk like short-term U.S. Treasuries. There is probably a way to take the riskiest investment in the world, combine it with short-term Treasuries and come up with a Moderately Conservative portfolio. This fund is essentially one-step riskier than a money market fund.
- PIMCO Investment Grade Corporate Bond Index ETF – CORP – This ETF is the “bonds” part of the Acorns investment portfolios. These are investment-grade bonds (not junk bonds) and is designed to track the BofA Merrill Lynch US Corporate Index.
So are Acorns investment strategies good?
Acorns Investments Review Good, Bad or Ugly?
As I’ve written multiple times before, when it comes to investing, what matters far more than investment selection is the amount of money you invest, and how long you keep it invested. That is true here as well. Remember, compound interest takes a long time to work its magic. The good news is that the whole point of the Acorns app is to keep you investing steadily over time. That is going to be a far bigger component of your long-term investing success.
That being said, the investments are solid, if somewhat unusual.
First, this is all index investing. That means these investments are cheap. Fees won’t be eating into your returns, and you don’t have to worry about “beating the market” since the point of index-based funds and ETFs is not to beat the market, but rather to BE the market. If the market is up 7 percent, so are you. This is good.
Second, the diversification in the Acorns portfolios is good, but not traditional. Again, while we are talking about hundreds or thousands of dollars, it really isn’t material, but if you ever did end up with a lot of money in your Acorns investment account, you would want to ensure that you compensate, if necessary, in other areas of your portfolio.
Typically, a financial advisor or financial planner would divide up your money in stocks and bonds to achieve a portfolio that matches your risk tolerance. At most major brokerages or investment firms, that would entail mutual funds or ETFs just like with Acorns. The difference is in two major areas, and one minor one.
First, most diversified portfolios include some exposure to international stocks, and so does Acorns. However, Acorns only includes emerging markets, that is economies that are still developing. That means your Acorns portfolio does not include any investments in Europe, Japan, or Australia. This isn’t necessarily good or bad, but it is different. Since emerging markets are more volatile this choice means dialing back the international exposure quite a bit for the more conservative settings.
Second, the inclusion of a REITs part of the portfolio is non-traditional as well, at least one this big. The Aggressive portfolio, for example, includes 30 percent invested in REITs. The theory is that real estate is a non-correlated asset to the stock market and therefore might do well when stocks are declining (or vice versa). The catch here is that REITs are still stocks, and stocks, even real estate stocks, don’t fully decouple from the correlation of the markets. If there is one area that gives me pause about how good the Acorns portfolios are, it is the large allocation to REITs.
Here is my point. Below, you’ll see the annual performance of the specific REIT ETF that Acorns invests in. While the size of the moves are different, there is a lot in common with the ups and downs of the stock market. Part of that is that good economy is good economy (and in 2008 vice versa).
The next image is a similar chart to the above for an S&P 500 ETF. In this case, this is for the SPY S&P 500 ETF. This is for example purposes because the actual Vanguard SP500 ETF used is not old enough to have the years before 2011 included. So, there are some differences but a lot of the overall direction and magnitude are in the same ballpark.
Here is what we are looking at. The REITs are indeed different, but often move in the same direction, with the very notable exception of 2007 when real estate was falling apart, but the stock market hadn’t figured that out yet. Obviously, there is some value in including REITs in a diversified portfolio, but the 30 percent number seems an odd way to push for more aggressive returns. Let me be clear, this is not wrong or bad, just not traditional.
The final, smaller difference is the lack of a mid-cap investment option. Perhaps this is where that extra REIT allocation is coming from. Mid-cap stocks often end up being the best performers over the 10 year period, partly because they are bigger enough than small-caps to not have such volatile swings (especially in down markets) but smaller enough than large-caps to have plenty of room to grow.
Again, this isn’t wrong, but the typically financial advisor will send you home with a portfolio that has a mid-cap option (maybe split into mid-cap growth and mid-cap value) and with a smaller amount allocated to REITs. In some ways, this difference in portfolios offers even more diversification for your overall assets.
In the end, the Acorns investments are solid portfolios. They are built using low-cost ETFs which is important both for you the investors, and for the company. For you, the anchor of higher fees isn’t weighing down your returns. For Acorns, the ability to get into and out of ETFs cheaply is important to its low-cost, no minimums fee structure.
Finally, Acorns automatically rebalances your portfolio for you. This is huge, and maybe more important to your long-term success than getting the particular investments or percentages just right. The reality is that if you look at a chart of which asset class performed best each year, you’ll see that it varies greatly. Sometimes, small cap stocks are the big winners, and then the big losers in the next year or two. If you don’t rebalance your portfolio, you end up just riding the wave up and down. However, with rebalancing, you pull money out at the top, and put it in at the bottom. This is how to buy low and sell high without ever knowing anything about stocks, and like everything with Acorns, it’s automatic.
Acorns rebalances your funds by taking your incoming contributions and investing them where you are low. More importantly, it will actually transfer funds between investments quarterly if things get more than 5 percent out of balance. That means that Acorns will be selling after that 30 percent run up to lock in some gains.
If you like the idea of automatically investing over the long-term to build up a nice portfolio, then the Acorns portfolios are going to be just fine for achieving that.
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