Nutmeg are the UKs largest and fastest growing digital wealth management service. We reviewed the robo-investing platform back in February 2019 and we were so impressed that I continued to invest a small portion of my wealth with them on a monthly basis.
Other than the great investment returns, one of the things that we loved about Nutmeg was their transparency and the huge amount of information they make available on their website.
For some investors they just want to give their money to the pros, so they don’t need to worry about it themselves. For others though they want a deep understanding of what is happening with their money.
We know your time is precious, so we’ve gone through some of the Nutmeg resources on their website and in this video, we’re going to look at how Nutmeg choose ETFs to invest in and show you my actual Nutmeg portfolio.
Whether you invest in Nutmeg or not this is a great resource to learn exactly what to look for when selecting ETFs.
And don’t forget – sign up to Nutmeg using the link on our Offers page, and you get a zero fees shield applied to your account for the first 6 months. Enjoy!
YouTube Video > > >
Who Are Nutmeg?
For more info check out our full Nutmeg review but very briefly, Nutmeg is a robo-advisor that will ask its customers a few questions and then invest the customers money into one of its many portfolios that it considers most suitable.
Their portfolios are put together using Exchange Traded Funds or ETFs as they’re more commonly known. This is something that we at Money Unshackled really like as they’re a great instrument for achieving huge diversification at rock bottom prices.
So, How Do Nutmeg Select Their ETFs?
#1 – The Components of the Index
They look under the bonnet (or hood, if you’re American), to find out whether they would invest in the actual stocks that make up the index.
Many indices are weighted by market capitalisation so that the larger stocks make up more of the index. We often use the FTSE 100 as example, with Shell consisting of about 11% of the index just on its own.
By looking at the underlying components they can assess whether the index is suitable.
#2 – Method of Replication and Tracking Error
Not all ETFs own every single stock within an index. Doing so can be difficult and expensive, so many funds choose to optimise selection by only investing in a sample of stocks within the index.
This is one reason why ETF performances can often deviate from the index, in what is known as tracking error. At Money Unshackled we prefer ETFs that use full replication, but this isn’t always possible.
Nutmeg will then assess the tracking error and will choose funds which are as closely aligned as possible.
# 3 – Costs
Investors these days are very conscious about costs and they must be kept to a minimum. So, with no surprise Nutmeg aims to invest in the lowest cost ETFs that match its other requirements.
#4 – Size and Trading Volume
As with stocks, many small ETFs don’t trade in high enough quantities to make them liquid enough, so these will be avoided or at least won’t make up a large proportion of a portfolio.
They also seek ETFs with low bid-offer spreads.
This is the gap between the buying and selling price and can get quite large on smaller ETFs that are not traded frequently.
#5 – The Type of ETF
Some of you might be surprised to learn that not all ETFs directly hold the underlying stock or investment. Those that do are known as physical ETFs and are our preferred type.
In fact, we won’t ever invest in in any other ETF type and to our relief neither do Nutmeg.
The other main type is called a “synthetic” or “swap-based” ETF – These involve legal agreements between 2 parties to produce the return.
This would expose you to counterparty risk, and in both Nutmeg’s and our opinion this isn’t worth the risk.
Other Considerations
Many ETFs will leave the investor exposed to currency risk and in some cases, Nutmeg will invest in a “hedged” version to reduce this risk.
Also, most of the major ETFs are very straight-forward index tracking funds.
However, there are some more exotic Actively Managed or Enhanced ETFs that Nutmeg may take advantage of but according to Nutmeg these are unlikely to make up a large proportion of portfolios.
What ETFs Do They Invest In?
In Nutmeg’s own words, they “choose from a universe of over 1,800 ETFs and favour physically backed ETFs with high liquidity and good tracking performance.”
I was assessed to have a high-risk level, and this is the portfolio that I was placed into. As you can see over 35% of the portfolio is in the iShares Core S&P 500 ETF. Note that this is the hedged version, which attempts to minimise foreign currency risk:
We totally agree with this position. All investors need large exposure to the US as it’s the World’s major market but as UK investors we could do with some protection against currency swings. This achieves this and also comes in with a low TER of just 0.10%.
Next in the list is the Vanguard FTSE 100 ETF at around 10%. Again, we totally agree with having a large investment in the UK’s 100 largest listed companies. This is extremely cheap at just 0.09%
We have always loved Vanguard but must wonder why Nutmeg didn’t opt for the ever so slightly cheaper iShares equivalent.
Both are dirt cheap, so no problem either way. Perhaps they didn’t want too much exposure to any single ETF provider.
Next on the list with 9.5% is another iShares S&P 500 ETF, but this time it’s not hedged. Again, this is the US’s major index and the lack of currency hedging is perfectly fine in our eyes especially as we both have a high preference for risk and reward.
In fourth spot is the iShares S&P SmallCap 600 ETF at 6.4% of the portfolio. This is a riskier investment as it offers exposure to 600 small US-listed companies. We both love this because smaller companies tend to grow at a faster pace than large companies – you may have heard of the phrase “elephants don’t gallop”.
The portfolio contains many more ETFs but the allocation percentage gets far smaller as the geographical markets become less significant to UK investors.
What do you think of the Nutmeg portfolio that I’m invested in? What are they doing right and what are they doing wrong? Let us know in the comments section.
Written by Andy
17 Comments
They have 5% bonds in areas that have a high correlation to equities (corp bonds) so won’t have much diversification benefit (and if you just wanted yield there are other options). If you have to have bonds (i personally don’t) then I’d go for boring US or UK short term gov bonds.
I suspect some of those ETFs lower down the list have some hefty fees, guess it can’t be helped for some of the more exotic holdings.
I’d probably swap out all the single country exposure (Canada, Switzerland, Nordics) for a higher weighting of factor based ETFs (more small cap, some value funds, maybe some quality factor ETFs etc).
You should check our our recent video on How to Own the World with 6 ETFs 🙂
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