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ETFmatic offers 3 types of portfolios to suit your way of investing

March 3rd 2017

Update: Investment styles, such as Starter Portfolios, Investment Plans and Custom Goals, have been combined and are now managed via advanced features.
The following diagrams and tables are for illustrative purposes and are not based on real data. Movements have been exaggerated and do not neccessarily reflect actual market conditions.

We’ve written extensively on our three types of portfolios but it’s important to understand exactly how they differ, and perhaps most importantly, how they behave in changing market conditions. Our offerings are quite different from each other and were generated by client demand, this means there’s an option that’s suitable for you and not just a one-size fits all portfolio. Let’s see how they behave.

What do they really do?

Starter portfolios

This is our simplest offering and combines equity and bond allocations to align with your appetite for risk. You determine your risk appetite and we adjust the stocks to bond ratio recognising that historically equities have given a higher return with more risk and bonds provided lower risk, but also lower returns.

Within equities we assign the different geographic regions their weighting according to their respective market caps based on the world equity market breakdown of the MSCI AC world Index. In plain terms this means that if the US market is as big as all the rest of the world it will represent 50% of your equity.

Within bonds we divide up between a local bond (80%) and a global bond (20%).

Starter portfolio’s weightings don’t fluctuate which means that every time you contribute, we’ll work out the current value of your holdings and try and buy new assets to bring it back to your fixed allocation percentages.

Simplified scenario #1:
You have a fairly conservative risk exposure that looks to have 50% stocks and 50% bonds.

If you invest £1000 we’ll use £500 for stocks of which about £280 will go towards US (S&P500) because of its market cap and the rest spread according to their respective caps. In bonds £400 would go towards UK bonds and £100 towards Global bonds.

During the following month, the value of the stock markets halve and the value of bonds goes up 50%. Suddenly your stock is only worth £250 pounds and your bonds are worth £750. You invest another £1000 and our rebalancing calculations would assign £750 towards stock and £250 towards bonds in order to bring it back to your chosen 50-50 balance.

Target % of overall portfolio Value of assets after 1st investment Value of assets after market movement New value after 2nd investment
Equities 50% £500 £250 £1000
Home equity (UK) 8% £80 £40 £160
International equity (Japan) 4% £40 £20 £80
International equity (US) 28% £280 £140 £560
International equity (Europe) 6% £60 £30 £120
International equity (Emerging markets) 1% £10 £5 £20
International equity (Asia ex-japan) 3% £30 £15 £60
Bonds 50% £500 £750 £1000
Home bonds (UK) 40% £400 £600 £800
International bonds (Global) 10% £100 £150 £200

Have a look at how a Starter Portfolio responds over time.

ETFmatic Starter Portfolio: Simplified simulation 10 year goal.
Static target Bonds 50% Stocks In the beginning, contributions are enough to pull the portfolio back to target at each trade The 1st big market shift, goal weights are pulled off target and slowly move back to target Another shift and the client decides to change their target weightings

Something to consider with this type of fixed percentage is the fact that it doesn’t fluctuate. Let’s say you start investing in a medium risk portfolio which contains 50% equity. You might be comfortable with this level of risk, and your portfolio weightings (and the risk profile you selected) will be kept constant over the long term to match this level of risk. Market values however do move over the short and medium term and therefore affects your portfolio volatility and returns. The volatility (the combinations of equities and bonds) in your portfolio won’t constantly adjust to match the risk you initially chose. Similarly, the risk you are comfortable with at the beginning of your investment is unlikely to be the risk you are comfortable with the week before you decide to draw down funds. Both of these issues are addressed by our Investment Plan option.

Investment plans

Investment plans are also called dynamic portfolios and for good reason. The asset allocation is constantly being updated in order to keep your portfolio as optimised as possible. In simple terms it’s optimised in three ways, the first is to keep your portfolio in line with the exposure and patience of your personal investment style. The second is to adjust weightings to try and increase expected returns for the same amount of volatility (Known as the efficient frontier). And the third is to adjust the weighting over time so that as you approach your target withdrawal date the volatility decreases (Known as a glide path). For this reason the asset allocations in any given moment may not be clear.

Simplified scenario #2:
You have a fairly high risk exposure, a high patience setting and an investing target date of 2037.

When you invest our platform reviews market history for 10 years (high patience), and calculates its returns and volatility for that period. Let’s say equity market returns, volatility and correlations are high for that period. This will naturally mean less weight is assigned toward them. However, you’re a long way from your target date which means you can sustain more volatility and would increase your allocation towards stocks. The result is a portfolio asset allocation that might not be as weighted in equities as you would expect, or as you would have with the same exposure setting on a Starter Portfolio. Every week we update your portfolio’s allocation percentages based on changes in the asset values, nearness to your target date and the recent history determined by your patience setting.

Have a look at how an Investment plan responds over time.

ETFmatic Investment Plan: Simplified simulation 10 year goal.
Dynamic target Target level of risk Bonds 50% Stocks In the beginning, bonds are strong but the capacity to handle a high exposure is greater. Target percentages are always changing in order to maintain a constant exposure level. The closer to the fund-withdrawal date, the lower the exposure.

Custom portfolios

Custom portfolios behave identically to a Starter Portfolio. The difference is that you decide the asset percentages and it’s your responsibility to update them. You can maintain your own glide path or react to market changes in any way you see fit. Your custom weights won’t get reviewed like our Starter Portfolios even when Market caps change significantly. Custom goals still have the other ETFmatic advantages you might not see with your broker, namely no trading costs and internal netting that means if one of your goals wants to sell an asset and another wants to buy the same asset we calculate the net trade automatically.

Pros and cons

So when deciding on your next ETFmatic portfolio these are the factors you might want to think about.

Simplistic Advanced Low Fees Generic Customised Expensive ETFmatic Starter Portfolio ETFmatic Investment Plan ETFmatic Custom Portfolio Active Manager Broker (Trading your own)
Starter portfolio

Why would I do this?
Straight-forward, ease-of-use, simple, one-click portfolio solution.

Why wouldn't I do this?
Less control, static, less customization

Investment plan

Why would I do this?
Investment plans allows you more control to determine the risk setting in your portfolio as well as how dynamically the asset allocation should adjust.

Why wouldn't I do this?
Investment plans are more complex than starter portfolios and follow modern portfolio theory which means the asset allocation generated can be quite different from what you would expect due to market movements.

Custom portfolio

Why would I do this?
Custom portfolios allow you to build your own asset allocation while we select the ETFs and manage the portfolio.

Why wouldn't I do this?
Custom portfolios add an additional layer of complexity. You will need to be able to select and maintain your own asset allocation

With all investments your capital is at risk and the value of your investments and the income deriving from it can rise as well as fall. Past performance is not a guide to future performance.