Acorns is a novel investment app which, when linked up to a funding account, will round up every purchase to the nearest dollar. It will then invest that money in a portfolio of stocks and bonds.
I started my Acorns account around the middle of November 2015. By the 18th, my account was established and my first investment had occurred. I initially opted for the Moderate portfolio. Like my Vanguard mobile account, screenshots are not allowed due to security protocol, but I had taken a few pictures from when I first opened the account for some friends who seemed interested in creating their own Acorns account.
There are five portfolios to choose from and every portfolio consists of the exact same funds, which are basically a mixture of stocks and bonds. The moderate portfolio is roughly 60% stocks and 40% bonds. A conservative portfolio consists of 40% stocks and 60% bonds, and so on. All five portfolios currently break down into stocks & bonds as follows:
Conservative: 40% stocks / 60% bonds
Moderately Conservative: 51% stocks / 49% bonds
Moderate: 61% stocks / 39% bonds
Moderately Aggressive: 74% stocks / 26% bonds
Aggressive: 89% stocks / 11% bonds
So far, nobody I talked with who was initially excited about Acorns and wanted to sign up has actually signed up. After talking with these people it became apparent that they didn't really understand what they would be investing in, so looking at the specifics of each investment may be useful.
Acorns’ stock funds
All of the stock funds are ETFs by Vanguard. That simple statement is where I lost most of my friends who had expressed interest in Acorns, so a little explanation may be in order. ETF stands for Exchange Traded Funds and they were first created in 1993 via the American Stock Exchange with the advent of "Spiders". The nickname Spiders comes from the acronym SPDR which stands for Standard & Poors Depository Receipts.
The ETFs we're talking about here are sometimes referred to as Index Funds since each ETF tracks a particular index. The S&P; 500 tracks about 500 of the largest U.S. companies. The question may arise: why invest in an Index or basket of funds instead of individual stocks? One answer would go back to a classic investment book called A Random Walk Down Wall Street which essentially says that in the long term, you can't beat the market, and if you can't beat 'em, join 'em!
The Vanguard investment firm that Acorn uses started in 1975 with $1.8 billion in assets under management and as of 2014 eclipsed $3 trillion in assets under management.
One huge benefit of ETFs is that you get instant diversification, so your money is not at risk with any one stock or company. After starting my Acorns account I decided to figure out exactly how many different stocks were in each index. The total number of stocks is 5,281. The breakdown is shown below with hyperlinks to the specific Vanguard page for each EFT:
VOO, Vanguard S&P; 500 - 505 stocks
VB, Vanguard Small Cap ETF - 1,516 stocks
VWO, Vanguard Emerging Markets ETF - 3,106 stocks
VNQ, Vanguard REIT ETF - 154 stocks
The bond portion of the Acorns portfolio comes from PIMCO and iShares as noted below:
CORP, PIMCO Investment Grade Corp Bond ETF - number of holdings = 270
SHY, iShares 1-3 Year Treasury Bond ETF - number of holdings = 94 (364 total)
Most investment products show the growth of $10,000 over a certain number of years to help get a historical perspective of what may be expected in the future. For the Vanguard funds I was able to create a comparison chart of the four Vanguard funds used in the Acorns portfolio. Below shows what investments of $10,000 in each of the funds have done over the preceding 5 years, from December of 2010 through December of 2015.
Depending on exactly which ending point is picked, these four funds essentially grew from $40,000 to about $60,000 in a five year time frame. The Vanguard S&P; 500 fund (VOO) didn't exist prior to 2010 so five years was the maximum data available for all five funds. The Vanguard Emerging Markets fund (VWO) looks a little dismal but over a ten year period it has produced an average annualized return of a little over 5%. It’s still a bit dismal in comparison to the other funds, but since it's dropped over 3% in the past five years maybe there's some potential growth to be had at a relatively good price right now. Time will tell.
Generally speaking stocks have more risk than bonds. If we look more closely at the four Vanguard ETFs offered by Acorns we note that a Risk Potential is assigned to each ETF:
All of the Vanguard stock ETFs carry a risk of either 4 or 5. Specifically, each fund has the following risk numbers. If you drill into the Risk Potential, Vanguard clearly states that funds at a Risk Level of 4 or 5 may be appropriate for investors who have a long-term investment horizon of ten years or longer. I've noticed several comments on the Acorns Facebook page with people unhappy about the overall value of their investments being down but the Acorn app has only been around since about August of 2014. According to Morningstar, the S&P; 500 index (SPX) was up 11.39% in 2014 and some of that price appreciation may have been realized by some early Acorn investors. However, that same index reveals a loss of 0.73% for 2015.
Another interesting piece of information may be gleaned from page 11 of the VOO prospectus which reveals the following chart:
As that table shows, stock market returns can vary widely in the short term but are less volatile in the longer term.
This leads us into the bonds portion of the Acorns portfolio and one of the few places where I've had concerns with Acorns.
Acorns’ bond funds
While Vanguard funds are not used for the bonds ETFs we can get a good idea of the risk and return for a comparable Vanguard bond fund such as the Vanguard Short-Term Government Bond ETF (VGSH), where we note the Risk Potential at 1. I like to think of bonds in a portfolio as a way to smooth out the bumpy ride of stocks. The greater the percentage of bonds in the portfolio the smoother the ride. As such, the Conservative Acorns portfolio should have the smoothest ride and the Aggressive portfolio would have the most bumps.
Missing corporate bonds
If you recall from a snapshot of the initial Moderate Portfolio I originally signed up for that 33% of my portfolio was in Corporate bonds with 6% in Government securities. However, on December 11, 2015 the account was reallocated. The previous 33% allocation to corporate bonds was cut by over a third to the current 20% and the 6% previously allocated to Government bonds was more than tripled to 19%. This change was listed as a Rebalance in my Acorns portfolio but seems more like a reallocation.
Other than age-based 529 plans or target retirement fund portfolios which become more conservative as one gets closer to college or retirement, I've never seen a portfolio changed midstream before. When I questioned Acorns about this change on their Facebook page, they claimed it was a due to changing market conditions, (i.e., the Feds raising the interest rates). I'm keeping an open mind about this but from my vantage point I saw a corporate ETF paying a respectable 3.1% get slashed while bolstering the anemic 0.6% in government securities. This was part of the reason I changed my portfolio allocation from Moderate to Aggressive (the Aggressive portfolio holds the lowest percentage in government bonds). Plus, I wanted to take advantage of the lower stock prices which have appeared at the beginning of 2016 to potentially boost long term gain.
Taking stock after one month
After my first full month of investing with Acorns (plus the extra half month I got in November), I ended up with a balance of $108.75. I was paid 42 cents in dividends and charged a $1 fee for using the Acorns service. This left me with a net of 58 cents paid and when divided by my balance yields a fee of just over half a percent at 0.53%.
The dividends got me thinking. The Vanguard stock ETFs pay dividends quarterly while bond ETFs pay monthly. For those of us who are not students or under the age of 24, we have to pay $1 per month or $12 per year for the Acorns service. But I realized there would come a point in our portfolios when the annual dividends earned would equal the $12 per year we have to pay in fees. I looked up the dividend rates for the various securities used in Acorns, then weighted those returns based on each portfolio’s specific allocation to determine the necessary balance in each portfolio to yield a dividend return of $12 per year and came up with the following table:
Some of you may recall we just had a Powerball lottery that broached the $1 billion mark. Over the last two drawings I spent a total of $12 for 6 tickets, the same as Acorns charges for a year's service. I've definitely had more fun with the $1 I've spent so far with Acorns. When my account first hit the $100 mark, I remembered thinking that any fool can carry a $100 bill in their pocket, but it takes a special kind of fool to allocate that $100 in over 5,000 different securities using four Vanguard ETFs, corporate bonds and government securities.
Image: Ed Schipul