Table of Contents

What is a robo-advisor?

What is an index fund?

Robo-advisors vs. index funds: Key differences

Potential benefits and limitations of robo-advisors 

Potential benefits and limitations of index funds 

What to consider when deciding between the two

The bottom line

LearnRobo AdvisorRobo Advisors vs. Index Funds: What Are the Main Differences?

Robo Advisors vs. Index Funds: What Are the Main Differences?

Jun 21, 2022

·

6 min read

Robo-advisors and index funds are both passive investing strategies. Deciding between the two comes down to a person’s investing confidence, time, and money.

People looking for a lower-cost alternative to a professional money manager often narrow their search down to a choice between a robo-advisor and index funds.

Both almost always rely on a passive approach to investing. Both seek to deliver a diversified mix of securities that track major segments of the stock, bond, or other financial markets. And both strive to match market returns, rather than to beat them. Most robo-advisors rely mainly on exchange-traded funds (ETFs) or mutual funds that track an index to anchor an investor’s portfolio.

The decision to go with a robo-advisor or index funds comes down to several considerations: Is the person comfortable and experienced with investing? Do they need advice or support? And how much time and money do they want to devote to selecting and maintaining their portfolio?

What is a robo-advisor?

Robo-advisors

are digital services that provide basic money management functions and develop a diversified portfolio for clients using an algorithm instead of a human. Although they may vary in size, scope, and services, all of them use computers to select investments based on a client’s answers to survey questions about risk tolerance, time horizon, financial goals, and other requirements. Computers select assets and make asset allocations, in most cases from a limited pool of exchange-traded funds (ETFs) or sometimes mutual funds that are designed to track an index.

Robo-advisors usually charge an annual management fee of about 0.25% to 0.5% of the customer’s assets. That’s less than the 1% or more a human advisor may charge. The robo-advisor fee generally covers basic account creation, oversight, and maintenance.

Robo-advisors operate as standalone entities or may be offered by big money managers.

What is an index fund?

No one can invest directly in a financial index such as the Standard & Poor’s 500. But asset managers and fund providers such as Vanguard and Blackrock have created hundreds of funds based on indexes and made them available to investors.

An index fund is simply a basket of securities that seeks to provide exposure to the stocks, bonds, or other assets within a particular universe. Some funds invest in all of the securities in a market index, while others invest in only a sample of securities in the index, such as tech stocks. 

Index funds are structured as mutual funds or ETFs. ETFs trade throughout the day on an exchange like stocks while mutual funds trade once a day as markets close. ETFs generally carry lower fees than mutual funds, although the differences will be minimal for passively managed mutual funds versus those that are actively managed.

Index funds have soared as a share of the overall fund market. In 2010, index mutual funds and ETFs accounted for 19% of the market’s $9.9 trillion in total net assets. By 2020, that share had jumped to 40% of the market’s $24.9 trillion in total net assets, according to an analysis by the Investment Company Institute.

Popular index funds track major equity indexes including the S&P 500, which includes 500 of the biggest U.S. companies; the Nasdaq 100 Index of large non-financial companies on the Nasdaq stock market; and the FTSE Global All Cap Index of large -, mid-, and small-cap stocks.

Investors can buy index mutual funds through money management firms or the fund company that created them. Investors can purchase ETFs directly through either a traditional or online brokerage account.

Robo-advisors vs. index funds: Key differences

Robo-advisors differ from stand-alone index funds in key ways. 

  • Choice.

    With a robo-advisor, computers select the funds for a client’s portfolio based on personal specifications. And algorithms routinely adjust, or rebalance, the investment mix to keep the portfolio in line with the investor’s specifications. With index funds, an investor chooses which index fund to buy or sell, and when. 

  • Additional capabilities.

    Robo-advisors typically offer online tools to help the investor clarify their priorities and long-term goals. Robo-advisors also often offer strategies to reduce an investor’s tax liabilities through tax-loss harvesting. Index funds do not.

At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.

Loading...
Get Started

Potential benefits and limitations of robo-advisors 

Robo-advisors allow for personalization and come with additional capabilities, but investors pay for this in management fees.

Potential benefits

  • Personalization

    . Robo-advisors create a portfolio based on a client’s age, goals, risk tolerance, time horizon, and other individualized data.

  • Advice

    . Robos offer online advice, research, and planning tools; most provide access to a human consultant at an extra cost.

  • Maintenance

    . Robo-advisors rebalance a portfolio to keep it in line with a client’s goals. They may also provide tax-loss harvesting, reducing taxes owed on any capital gains.

  • Low minimums

    . Most robo-advisor accounts have low, or even no, minimum balance requirements.

Potential limitations

  • Fees

    . Robos charge a management fee on top of fees clients pay to own the securities in the portfolio. Extra personal help costs more.

  • Limited choices

    . Robo-advisors generally rely on a limited number of pre-selected ETFs, reducing choice.

Potential benefits and limitations of index funds 

Index funds don’t have management fees, but investors are responsible for maintaining their portfolios independently.

Potential benefits

  • Lower cost

    . Index ETF expense ratios are lower than robo-advisors, and some have no fees at all.

  • More variety

    . Investors can choose from thousands of index funds beyond the staples used by robo-advisors.

  • Control

    . The investor, not a computer, chooses the funds and decides when to buy and sell.

Potential limitations

  • No support

    . Investors in index funds must do their own research and make their own selections and purchases.

  • Maintenance

    . People must monitor and adjust their portfolios to keep them in balance and optimize tax benefits.

  • Higher minimums

    . Index mutual funds often have high account minimums.

What to consider when deciding between the two

The choice between a robo-advisor and index fund c to a person’s investing confidence, time, and money. 

Individuals with experience and interest in selecting their own portfolio may find index funds meet their needs. The funds track the world’s biggest stock, bond, and other markets, allowing an investor to capture the markets’ returns in a single security. Index funds give the investor a wide range of choices and save the management fee associated with a robo-advisor.

People who are less confident about investing or those who want planning and other advice will find a robo-advisor that offers online support and long-term investment management. Robo-advisors can clarify one’s investing objectives, and select a portfolio to meet them. They can also save clients the time and effort required to keep a portfolio in sync with their goals. Of course, investors have to pay more for this hand-holding.

The bottom line

Robo-advisors and index funds are both passive investing strategies. Index funds will by definition never outperform the underlying index, nor will robo-advisors that rely on index funds to underpin a client’s portfolio. And of course, indexes themselves are not guaranteed to rise, although major equity indexes such as the S&P 500 have appreciated over time.

Disclosures

Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.

Three Things, a newsletter from Titan

Stay informed on the most impactful business and financial news with analysis from our team.

You might also like

How Much Are Robo-Advisor Fees?

Learn how robo-advisors use algorithms and software to execute automated investing for clients at a low cost without in-person advisors.

Read More

Robo Advisors vs. Target-Date Funds: Key Differences

Robo-advisors are digital services that rely on algorithms rather than humans to build and manage a client’s portfolio and provide investing advice. Target-date funds are mutual funds that are made up of other mutual funds and ETFs and are generally structured as a fund of funds.

Read More

Robo-Advisors vs. ETFs: What Are the Main Differences?

Robo-advisors are digital services that take much of the guesswork out of building and managing a portfolio. ETFs bundle stocks, bonds, commodities, and other types of investments into a single security that trades on an exchange like a stock does.

Read More

Understanding Robo-Advisor Returns

Robo-advisors are an increasingly popular alternative to traditional human financial advisors. Each robo-advisor varies in the services it offers and the fees it charges.

Read More

Cash Management

Smart Cash

Smart Cash FAQs

Cash Options

Get Smart Cash

InstagramTwitterYoutubeLinkedIn

© Copyright 2024 Titan Global Capital Management USA LLC. All Rights Reserved.

Titan Global Capital Management USA LLC ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). By using this website, you accept and agree to Titan’s Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities or investment products. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Account holdings and other information provided are for illustrative purposes only and are not to be considered investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.

Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.

Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.

The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.

Cryptocurrency advisory services are provided by Titan.

Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.

Contact Titan at support@titan.com. 508 LaGuardia Place NY, NY 10012.