Automated Investing: Not Just Passive ETFs

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14 January 2015
William Trout
An investment management firm launches an actively managed automated investments platform and calls it pioneering. Automated competitors call this a dangerous heresy: portfolio management by algorithm and active money management should not mix! Both sides are off the mark. Active asset management within an automated framework is not new…see firms like Hedgeable. Nor do automated platforms amplify any risks involved in active management. On the contrary, the efficiencies offered by automated investment platforms lend themselves to a range of active management strategies. The objective here is not to argue for active or passive management styles but to clarify the parameters of the debate. Active investing is often understood by retail investors as simply “stock picking,” but it is really about taking a position against the market. Typically this is done within a discrete asset class, e.g. stocks or fixed income. Tactical investing uses slightly different means (weighting one asset classes over another, rather than focusing on a discrete asset class) to achieve the same objective. It is a twist on active management that is often used to capture short term gains. TradeKing Advisors’ automated Momentum portfolios employ just such a tactical approach, tweaking asset allocations to capture market momentum. Automated advisor Motif Advisors takes active management a step further via a thematic approach that allows investors to build what are essentially customized ETFs (based on holdings of individual securities and/or portions thereof), which are then bundled into “folios” or themed portfolios, e.g. Chinese Internet, Ebola-fighting drugs. In addition to personalization, this approach enables efficient tax harvesting, since the investor owns actual shares. Strip out the cost of the human advisor via an automated platform, and the investor has a more-than-decent shot at outperformance. The money manager also gains by eliminating the middleman and getting one step closer to the client. Therein rests the point. The benefits of automated investment platforms accrue to both active and passive investment management styles and in this respect, the platforms should be considered agnostic. There will always be investors who want to take a position against the market, whether via tactical approaches, thematic models or security selection. Automated platforms give them a more cost-effective, and indeed transparent, way to do so.


  • The key to automated investment is that it takes away cost. It needs to be used wisely but why review and perhaps rebalance a portfolio annually when you can provide an automated solution which can do this monthly, weekly or perhaps even daily.

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Asia-Pacific, EMEA, LATAM, North America