Wealthfront--one of the larger and earliest robo advisors-- has introduced a new program called advanced indexing which combines several of the factors used in factor ETFs such as momentum(availabe in MTUM ), dividend minimum volatility(USMV) and quality (QUAL) and dividend (such as Schwab's Dividend Equity ETF(SCHD).

The strategy which they call PassivePlus®. is based on proprietary research --in other words unlike the momentum, quality and value strategies available there is no library full of academic research backing up their choice of strategy. It is impossible to know their methodology for categorizing stocks as they do, nor of their chosen proportion of each characteristic, and there is no regular listing of holdings,p/e price to book and other characteristics of the portfolio,

Wealthfront's description

Constructing the Modified Index

After constructing the single-factor strategies we combine them to produce a multi-factor “overlay” portfolio, which includes securities with good value, strong momentum, high dividend yield, low market beta, and low volatility. This overlay portfolio is blended with the cap-weighted index to produce a modified index, which serves as the benchmark relative to which the stock-level tax loss harvesting algorithm will seek to minimize tracking error. The goal of this construction is to overweight securities with high expected returns, while ensuring the modified index remains close to the cap-weighted benchmark, thus keeping overall portfolio risk unchanged.

The Smart Beta Flip Flop at Wealthfront

To say the least ironically top executives from Wealthfront have been outspoken critics of "smart beta"

...in 2015, former Wealthfront CEO Adam Nash wrote a scathing article criticizing Charles Schwab’s robo advisor for, among other things, allocating users to smart beta ETFs.

“The average smart beta ETF that Schwab has selected not only has 3 times the management fees of the average Vanguard ETF, but not surprisingly, all are either proprietary Schwab ETF products or ETFs from issuers that pay Schwab to use them,’ Nash said. He included a quote from John Bogle saying “smart beta is stupid” and referenced Malkiel’s feelings about smart beta. “Last year, Burt Malkiel, our CIO, explained why smart beta products are not smart investments.”

Just a year ago, Malkiel reiterated his disdain of smart beta to the Wall Street Journal, saying they are riskier than index funds and just a new way for managers to justify fees. In a 2016 update of his book, “A Random Walk Down Wall Street,” he devotes a chapter to arguing why smart beta isn’t good for individual investors.

I must say I find it disappointing that Malkiel long a pioneer in advocating straightforward low cost capitalization weighting indexing now puts his name on these strategies.

Here is his flip flop

WSJ May 8 2016

Burton Malkiel Is Still an Indexing Fan, but a ‘Smart Beta’ Skeptic

The author of ‘A Random Walk Down Wall Street’ says smart-beta strategies are riskier than index funds and not right for individual investors

Mr. Malkiel, the economist known for being one of the biggest proponents of index investing, continues to be among the skeptics of these popular mutual funds and exchange-traded funds, which blur the lines between active and passive management.

The “beta” part of the name refers to an index, or an index fund’s, return. The “smart” part means that the funds weight stocks in an index based on factors such as low volatility, high quality or high momentum (rather than on market value like a typical index fund) in a bid to produce better returns....

And here is the flip flop a little over a year later..not coincidentally of course Malkiel is Chief Investment Officer of Wealthfront. To the best of my knowledge he has never done data driven research on finance and certainly not on factor investing..of which he has been skeptical his entire carerr up till now (he is 84) and through 44 years and 9 updates to his classic Random Walk Down Wall Street:

NYT June 22, 2017

An Index-Fund Evangelist Is Straying From His Gospel

In his classic 1973 book “A Random Walk Down Wall Street,” Burton Malkiel, a Princeton economics professor, made an assertion that was startling at the time: that “a blindfolded monkey throwing darts at the stock listings could select a portfolio that would do just as well as one selected by the experts.”

Three years later, Vanguard, the asset manager where Mr. Malkiel served on the board for 27 years, started the first passive index fund, an innovation that has swept the financial world.

Now, at age 84, Mr. Malkiel has had a remarkable change of heart: Maybe the experts can beat the monkeys after all. That is, if the experts are software engineers writing sophisticated algorithms for computer-generated trading.

Mr. Malkiel is chief investment adviser for Wealthfront, a pioneering automated investment manager that last week adopted a new approach it calls Advanced Indexing. The strategy aims to exploit market inefficiencies and beat the passive approach, based on an index weighted by stocks’ market capitalization, which Mr. Malkiel has long championed. This falls within a broad investing category known as “smart beta,” beta being a measure of the volatility of a security or a portfolio in comparison to the market as a whole.

“I have been a critic of smart-beta funds because they have typically been sold with high expense ratios and have ignored tax consequences,” Mr. Malkiel told me this week. “Smart beta has in effect been expensive beta.” But decades of academic research into efficient markets and Wealthfront’s ability to deliver a smart-beta approach at low cost, coupled with tax efficiency, finally won him over, he said.

I find the argument about expensive beta a bit specious the ishares USM,QUAL and MTUM have fee of 15%, Vanguards Value ETF has a fee of .07%, Schwab's Dividend ETF has a fee of .07%. Wealthfronts fee (which to be fair includes other services) is .25%.

I addition to value and momentum factors, Wealthfront’s approach embraces stocks with high dividend yields, low market beta and low volatility, all factors that “have proven robust across long time periods, geographies and asset classes,” Mr. Jurek said. (Wealthfront excluded another widely cited factor, small market capitalization, because its investment universe is limited to large-cap issues.)

Wealthfront’s testing against historical data indicates its multifactor approach outperformed a strict index approach by an average of 1 percentage point per year over the past 50 years, and even more since 2000, without any increase in volatility. As would be expected, there were some periods in which it underperformed.

1% excess return based on historical data is a very slim advantage. Backtested data does not take into account trading costs involving the bid ask spread or intraday moves it is based in almost all cases on closing data.

Interestingly Robert Arnott whose Fundamental Indexing book and researh pioneered the field has recently raised questions about some strategies particularly due to valuations.

From the NYT article
Smart beta has its critics, including Mr. Arnott, viewed by many as the godfather of the field. “Smart beta can be smart, and then it can be not so smart,” Mr. Arnott said. “There are tons of strategies being offered now based on nothing but back tests. Anyone can create a brilliant strategy with benefit of hindsight. But does that mean anything for future returns?”
“Pretty much everyone is looking at the same factors, which is a danger,” he added. “It’s a very crowded space. If 10,000 quants are all looking at the same data and trading on it, the chances are that it’s not going to work.”

Mr. Jurek (director of research at Wealthfront) responded that “at a very general level, you could say that every back test is problematic.” But he stressed that “when designing Advanced Indexing, we relied on decades of peer-reviewed research to select factors that have stood the test of time”

The above is a bit of intelletual sleight of hand. Although it is true thst there is pee reviewed research on the factors, the lack of transparencey means there is no peer reviewed research on the Welthfront criteria for characterizing stocks and the proportions they use.

One more note..Wealthfronts strategy only includes large cap stocks although the largest outperformance found in research dating back to Eugene Fama's nobel prize winning work was in small value stocks.

Investors wanting to incorporate smart beta strategies in their portfolio may well be better buying the individual strategy ETFs rather than the "black box" of Wealthfront's "Passive Plus".