Robo Advisors vs S&P 500: Which Should You Pick As Your First Investment?

Robo advisors or S&P 500 exchange-traded fund (ETF)?

That’s a question many new investors have on their minds.

You might have come across these investments but still aren’t too sure what’s the better option for you.

Well, fret not as we’ll be deep-diving into the pros and cons of each and to find out which is best suited for your investing style!

TL;DR: Should You Invest With Robo Advisors or DIY with an S&P 500 ETF?

What Are Robo Advisors?

Let’s kick things off with the hottest investment product right now: robo advisors.

Simply put, robo advisors are digital platforms with various portfolios that you can pick from based on your risk profile.

As the markets go up and down, robo advisors use complex algorithms and systems to rebalance your portfolios in order to capture returns or reduce your portfolio’s exposure when the stock market isn’t doing well.

In this article, we will be looking at investing in the “flagship” portfolios of robo advisors that are 100% stocks/equities.

What Are (S&P 500) ETFs?

An ETF is an investment vehicle that lets you invest in a variety of companies based on the index it tracks.

When it comes to ETFs, there are many funds out there and it is rather tough to compare all of them to the robo army that are robo advisors.

So for the sake of comparison, we will be looking at one of the most popular indices that some ETFs track: the Standard & Poor’s 500 (S&P 500 Index).

There are plenty of ETFs that track the S&P 500 index as well, but since we are all about cost savings, we will use the Ireland-domiciled Vanguard S&P 500 UCITS ETF Dis (VUSA) when comparisons are made.

Why an Ireland-domiciled S&P 500 ETF?

Singaporeans enjoy lower dividend tax when investing in these ETFs.

Robo Advisors vs S&P 500 ETF

Ease of Access

Robo advisors

The advent of robo advisors has made investing easy af; All you have to do is sign up for an account, fund it and pick your portfolio after taking a risk assessment.

You won’t have to go through the process of starting a Central Depository Pte Ltd account (CDP account) and then opening another account with your broker of choice to invest.

Moreover, many robo advisors do not require a minimum amount to start investing. The ones that do require as little as $1 to $5,000.

With the power of technology, many of these platforms also let you set up recurring transfers to your investment portfolios so you can pretty much ‘fire and forget’ while letting your money work for you.

S&P 500 ETF

On the other hand, ETFs are a little harder to get into as you’ll need to open a brokerage account that has access to the market with the ETF that you want.

In our case for VUSA, you will need to open an account with a broker that has access to the London Stock Exchange. Moomoo and Tiger brokers, for example, don’t have access to this market yet.

Apart from selecting the most suitable broker for your preferences, you’ll also need to know how to actually trade with the broker’s app or website.

Moreover, you’ll need to buy your ETFs in whole units and in the currency that the ETF is traded in.

Yes, you will need to convert your SGD into USD for the case of VUSA.

Since the price of VUSA is currently 59.19 GBP or S$100.18, you can only start investing with this amount, unless you are using a broker that has access to fractional shares.

Approach to Investing and Investment Knowledge Required

Robo advisors

Robo advisors bring investing to the masses with little to no knowledge of investing required since they invest your money for you.

However, this in and of itself is a massive problem.

I’ve seen many people on forums and discussion threads asking questions that show that they do not know what they are even investing in.

These people think that just by putting in their money with a robo advisor, they’ll magically see their money grow in a year or two.

As we’ve always been advocating for here at Seedly, it is imperative that you do your own due diligence, even with robo advisors!

That means that you should read up on the underlying funds in the portfolios offered, the allocation of funds, the markets they are exposed to and more.

If you’re reading this article, you’re already on the right track.

S&P 500 ETF

With ETFs, you are kind of forced to learn how to invest since you’ll need to actually trade for yourself.

DIY investing gives you a brilliant opportunity to familiarise yourself with what the S&P 500 index is, the terms used in the financial world, the fees associated with trading and a whole lot more.

In layman’s terms, you can think of DIY investing as completing a workbook while robo advisors are kind of like paying your friend to help you do your homework.

Fees And Costs

Robo advisors

Perhaps one of the most enticing benefits is the fact that robo advisor fees are flat and easy to understand.

These come in the form of platform, management or advisor fees, on top of fund-level access fees, aka expense ratios (the cost of managing the underlying ETFs that make up a robo advisor’s portfolio).

Most robo advisors do not charge you a fee to transfer or withdraw your funds out of a portfolio, which is another huge plus as you can Dollar Cost Average (DCA) without worrying about incurring trading fees for each trade you make.

That said, robo advisor fees coupled with fund-level fees are generally higher than that of the trading fees and fund-level fees paid when investing directly into an S&P 500 ETF.

According to a post by our very own Seedly Community member, the total cost of robo advisor fees and fund-level fees range from 0.94% to 1.63% p.a.

This means that for every $10,000 you invest with robo-advisors, about $94 to $163 is paid in fees annually.

S&P 500 ETF

When you trade VUSA, the fund-level access fee or expense ratio is only 0.07% p.a.

However, you’ll need to pay trading fees and currency conversion fees every time you initiate a trade.

For this example, I’ll use Interactive Brokers (IBKR) as it has access to the London stock exchange so we can trade VUSA.

IBKR has the following fees:

• Trading fee of 0.05% and a minimum per order of US$1.70.
• Currency conversion fees of 0.02% with a minimum of US$2 (or USD currency equivalent) per order.
• (Negligible) third-party fees (clearing fees and exchange fees).

That means you’ll be paying a one-off trading fee of $7 if you were to invest $10,000 and $7 per year if you hold your investment.

Even if you were to DCA monthly, you would only be paying $84 per year in trading fees plus $7.

Then again, this does not take into account currency exchange rates.

DIY investing in S&P 500 ETFs is generally cheaper than investing with robo advisors. 

However, you are paying extra for the convenience, expertise, and use of their systems.

Market Exposure

This is where the differences really matter.

Robo advisors

For robo advisors, you’ll most likely get wider exposure to various markets around the world, making it an even more diversified investment than an S&P 500 ETF.

For example, Endowus’ Core Flagship portfolio has exposure to not only the U.S. but markets such as Japan and China as well.

For an S&P 500 ETF, you’ll only be getting exposure to the U.S. stock market. Whether that is a good or bad thing is completely dependent on how you view the U.S.

S&P 500 ETF

As for an S&P 500 ETF, you’ll only be getting exposure to the U.S. stock market. Whether that is a good or bad thing is completely dependent on how you view the U.S. market.

Risk Management

Robo advisors

If you’re a risk-averse investor, robo advisors also offer a mix of stocks and bonds in their portfolios which helps you reduce your risk exposure.

You can choose to reduce your risk by selecting a less aggressive portfolio and the platform will adjust your portfolio accordingly without the hassle of you trading a stock.

Some robo advisors also offer “portfolio protection” whereby their systems will automatically reallocate your portfolio if it reaches a certain threshold.

S&P 500 ETF

As for investing on your own in an S&P 500 ETF, you’ll basically eat whatever the stock market has to offer. If the S&P 500 index goes down, your portfolio will drop by the same amount.

The only way to manage your risks is to sell your ETFs for less risky investment vehicles.

Returns

While returns are probably at the top of our minds when it comes to investing, it is important to remember that past performance is not indicative of future results.

Disclaimer: The above data is not representative of the performance of robo advisors as it only takes into account a short span of one and a half years. 

So far, based on the robo war experiment that one of our Seedly Community members has done, we can see that some robo advisor portfolios have performed similarly to the S&P 500 portfolio in 2021 while others did not do as well.

Based on the most recent snapshot, we can also see that the drawdowns of most robo advisors are lesser than that of the S&P 500.

Be that as it may, I stress again that this data is only from a short period of time and one robo advisor portfolio may not necessarily be better than another or the S&P 500 ETF portfolio.

Again, it is imperative that you read up on what funds robo advisors use for their portfolios and take whatever projected returns that they market with a pinch of salt.

Which Should You Pick As Your First Investment?

All in all, it really boils down to you as an individual.

If you’re someone who likes the idea of a hands-off approach to investing as a time-starved adult, robo advisors would be your preferred choice.

BUT, not before you fully understand what you’re investing in and the risks associated.

Please, no more “why is my robo portfolio down X%” when the whole stock market is crashing…

For those of us who are more passionate about personal finance and want to actually learn the ins and outs of investing, taking your first step with an S&P 500 ETF is a good choice.

The Markets Are Bad Right Now, Should I Still Invest?

Unless you’re living under a rock, you’ll know that the stock market is sh*tting itself now and we are officially in a bear market (U.S.) as of 14 June 2022.

Markets rise and fall just like the tides and while it is extremely hard to predict when the bottom is, investors know that those who profit the most are those who are “greedy when others are fearful”.

Personally, I think that the markets will continue to dive for months to come.

That said, if you time the market, you may miss out on potential returns should the market take a turn for the better.

During these volatile periods, take your time to learn more about investing and experiment for yourself with money that you can afford to lose.