FAQs

Here are three links containing descriptions of our investment approach, in increasing order of detail:

• Download Presentation
• Our Asset Allocation Methodology
• Elm’s Strategy in the Journal of Portfolio Management

More than 400 investors have trusted us with over $2 billion of their savings. Please see our most recent Form ADV for current AUM as of the latest filing.

The core of our investor base comes from the financial industry – both active and retired professionals – though our systematic approach has also resonated with successful professionals from technology, medicine, law, and entrepreneurship. The typical Elm investor is 35-60 years old and has accumulated substantial savings. The rigor behind our methodology has also attracted many in academia – including current and former finance professors from Columbia, Stanford, UPenn, and Harvard – alongside practitioners who value our transparent, research-driven approach.

Elm Wealth manages a substantial fraction (>80%) of the liquid, non-real estate assets of the Management Team, i.e. Victor Haghani, James White, Jerry Bell and their immediate families.

The primary reason for our $1,000,000 SMA minimum is for us to be able to keep your costs low, in terms of us being able to deliver our services for our annual fee of 0.12% per year.

We are happy to consider accepting ETFs and Index funds you already own into Elm’s investment program for your Separately Managed Account. If the instruments are part of Elm’s current program or can reasonably be mapped into Elm’s program, we will typically accept them. For taxable accounts, on a case-by-case basis, we will also normally help you evaluate the costs and benefits of holding the legacy instrument versus switching to a lower-cost or better-structured similar instrument (if available). Once these assets are accepted into your account, we will routinely evaluate whether to continue to hold them based on all our usual criteria, including but not limited to Elm’s target asset allocation, transactions costs, expenses and tax considerations (for taxable accounts).

We hold assets with the following institutions for each of our products:

For US investors:
• Separately Managed Accounts at Fidelity or Schwab

For non-US investors:
• Our private fund – JP Morgan, Interactive Brokers and Fidelity

Many advisors charge higher, “fat” fees for smaller accounts, and the “right” fee for their largest accounts. At Elm, we simply don’t do that. We view 12bp as the absolute minimum marginal rate we need to charge, and we give that to all clients regardless of their size. We don’t know of any other advisors whose “top-tier” rate is below 12bp, and we have never charged a client less (not including Elm staff and families).

Getting started with Elm is intended to be as painfree as possible.

For US Separately Managed Account clients:

• Using our Online Onboarding, prospective investors can either add Elm to an existing account at Fidelity or Schwab or use our portal to open a new account
• Once your account is open, we’ll work with you to establish your portfolio baseline and dynamic scaling
• Following account funding, the portfolio will be invested during our next weekly rebalance.

For non-US investors in our offshore fund:

• Please contact us to receive the fund’s Private Placement Memorandum and Subscription documents

Each of our strategies follows our rules-based asset allocation methodology, an approach we call Dynamic Index Investing®. Please click here for a note that describes in detail the three main components of this approach: the construction of the Baseline portfolio and the value and momentum overlays to that Baseline portfolio which make the portfolio responsive to changing market conditions.

For an asset class to be included in our Baseline portfolio it needs to be:

• Big and producing undiversifiable risk
• Investible via low cost and liquid vehicles
• Likely to carry a risk premium which ideally should be observable prospectively
• Accessible without requiring specialized selection skill

Asset classes that meet these criteria for our SMA portfolios are public market equities, public market real estate vehicles and government and corporate bonds. Among the many investments that don’t meet these criteria are hedge funds, private equity, venture capital investments, bank loans, volatility indexes, convertible bonds, soft commodities, fine art and other collectibles, and cryptocurrencies. We also do not invest in individual equities.

Our policy is that we do not hedge the FX exposure. For example, when we buy Japanese equities through index funds or ETFs, we hold them without any associated short positions in the Yen/$ exchange rate. So, if the price of Japanese equities in Yen stays constant, but the Yen weakens against the dollar, then Japanese equities will reduce the return of our fund, which we report in dollars. We made this decision for the following reasons:

1. Simplicity: we invest in the equity markets of over 60 countries with most of them having their own local currencies. Not all of them have liquid and open FX markets. Furthermore, certain FX markets won’t be well described by Elm’s value and momentum framework, making us cautious in introducing this extra complexity into our approach.
2. FX hedging is not clearly risk reducing for countries whose stock markets tend to go down when their currencies strengthen (e.g. those with significant international trade).
3. If investors consider themselves global citizens, as many of our investors do, and choose to measure the value of their investments in a global currency unit (albeit with a home bias), FX hedging can also increase risk.
4. Negative correlation reduces returns: An FX hedge needs to be adjusted so that it stays in line with the value of the equity market it is hedging. If an equity market tends to go up when its currency weakens (and vice versa), then each rebalancing adjustment will be done at an expected loss to the hedger, as it will be necessary to go short more of the currency when it has weakened and to buy it back when it has appreciated, resulting in a significant drag on returns. Of course, the associated transaction costs are a further drag on returns as well.
5. It is very disturbing that a FX-hedged equity investment can lose more than 100% of its value – sounds too much like leverage for us.

No. We only charge the 12bp management fee. We do not charge an incentive fee, and our management fee is inclusive of operating costs, such as administration, audit and legal. There are no hidden fees.

Our only management fee is the 12bp (0.12%) we charge and we do not charge an incentive fee.

On trading commissions:
When trading ETFs we pay commission, of $0/trade. When trading mutual funds, we pay $45/trade in and $25/trade out. For a $1,000,000 account equal to our minimum account size, we expect trading commissions to be $0, though larger accounts may see a small amount of trading commissions from mutual funds. Our portfolio management system is designed to minimize total trading costs (trading commissions + market spread) by trading instruments appropriate to the account size – e.g. for $1mm accounts, we will only use ETFs, while for much larger accounts we will use a mix of ETFs and mutual funds while also minimizing the number of trades done on each rebalance date, subject also to optimizing for tax and risk considerations.

On underlying fund expenses:
The weighted average expense ratios change depending on the asset allocation. Depending on the currently held funds, the additional costs have ranged from 0.06% to 0.09% so far. We carefully select the vehicles we use to build our portfolios, and cost is one of the factors that we think is important.

Anything else?
In very seldom cases where clients require a significant amount of extra assistance during the account opening and onboarding phase, we may charge a modest fee to account for our team’s resources. This is a rare occurrence and in all cases, clients will be informed of this before the fee is assessed.

Researchers have long noticed that volatility tends to rise when the stock market falls, and vice versa. This suggests that for equities a simple Momentum metric can serve as a decent proxy for the level of equity risk. We prefer Momentum as an indicator of market riskiness rather than use a direct measure of market volatility for several reasons:

1) Momentum is a simpler metric, much more readily understood and followed by our clients. We are attracted to solutions that are low on complexity and high on transparency.

2) Implementing a momentum metric involves far fewer choices than required by a direct market volatility metric. With momentum, the main choice is the lookback window, which by convention is 12 months, and whether to use an average of the market level over that period, or the level at the start of the period. We use a 12-month rolling average.

If using a volatility metric, there are many more choices to make, and little convention to ground those choices on. One must choose between realized or implied volatility (or how to average them together) and what horizons and strike prices to use and whether and at what level to put a cap and floor on the level in terms of the biggest deviations from target weights that it could cause. Most critically, we’d need to choose a base level of volatility which would call for no deviation from baseline weights, and to make the not-very-realistic assumption that the base level is stationary over time.

3) Volatility is a much more volatile metric than momentum and would generate much higher portfolio turnover. This was a very important consideration.

Please read our article: Steadfast, Greedy, or Fearful? (2020) for a fuller discussion of this question.

In historical simulations of dynamic asset allocation between US equities and fixed income, the use of momentum rather than a direct measure of market volatility (either short-term realized market volatility or implied volatility of short-dated equity options) generated superior risk-adjusted portfolio returns (see the article mentioned above for more details). We emphasize that such backtests do not by themselves provide enough evidence to warrant applying either approach, or preferring one to the other: past returns do not indicate future performance.

TIPS are bonds issued by the US Government, with a fixed maturity (e.g. 10 years) and fixed percentage real coupon (e.g. 2%). Every day, the bond’s redemption value and coupon payments are adjusted based on the headline Consumer Price Inflation (CPI) Index. If you buy the bond at par and hold it to maturity, you’ll earn a real (i.e. adjusted for inflation) return equal to the percentage coupon, and a nominal return equal to the real return plus CPI. In the meantime, as with any bond, its market value will fluctuate based on the going market real yield for a given maturity.

For additional information, we wrote about why we like TIPS in a research post or see TreasuryDirect for more information about the mechanics of TIPS.

TIPS are designed to protect the real spending power of your wealth over a given horizon. If the frustrated investor above had bought TIPS maturing in four years, her wealth would have much more closely tracked inflation over that period. But while that’s tempting, as we’ll see below, it’s not necessarily her best course.

It’s natural that some investors think of inflation protection strictly as ensuring their portfolio value will rise during periods of unexpectedly high inflation. If that’s truly your only goal, you should buy short-dated TIPS. However, your long-term spending power is impacted not just by inflation, but also by long-term real interest rates. $1 million of wealth goes a lot further when real interest rates are at 4% than when they’re at 0%.

If your goal is to protect long-term spending power rather than the narrower goal of protecting inflation-adjusted wealth, then longer-dated TIPS (owned directly or through ETFs) make sense and are effective. However, just as “no man can serve two masters,” TIPS cannot protect inflation-adjusted wealth in the near-term while simultaneously protecting long-term spending power.

In “Back to the Future: Reviving a 19th Century Perspective on Financial Well-Being”, we discuss why we think protecting long-term spending power is the more desirable objective – and, for readers looking for a deeper dive, we discuss a number of related issues in these two notes as well:
How I Learned to Stop Worrying and Love the Bomb
A Sheep in Wolf’s Clothing

The question, “Should you buy bonds or bond funds?” gets a lot of discussion in the financial press. We often read that it’s better to buy individual bonds rather than bond funds, as you will never suffer a loss on individual bonds as long as you hold them to maturity. We think this argument is, at best, confused.

If you want to protect against inflation or lock in a real rate of return to a specific date, then you should buy and hold individual bonds, whose maturity will naturally run down as you approach your target date. However, we think this is a relatively rare use-case. Few people, even those getting on in years, have a specific date with their name on it. Instead, many investors either have a medium-to-long and rolling horizon, or are allocating between asset classes.

In either of the latter cases where you’re trying to maintain the duration of a bond portfolio, the mechanics of holding individual bonds versus a bond ETF will be very similar. In both forms, bonds will naturally be running off, and you’ll be replacing them by buying new issues. If the ETF is trading close to its Net Asset Value, as TIPS ETFs normally do, the returns will also be very similar between holding the ETF and a similar portfolio of individual bonds. The main difference will be that the ETF charges a management fee (0.03% in the case of SCHP), but is more convenient and likely has lower transaction costs than managing your own portfolio of individual bonds.