Welcome back to Fintech Fridays. In this edition, we look at the rise of micro investing and how it has increased the ability of young retail investors to access financial markets.
Micro-investing is the act of investing small amounts of money in financial markets. The strategy has become widely accessible due to fintech companies like Raiz (previously known as Acorns) and Spaceship, which allow users to set up periodic, automated cash flows for relatively small fixed or varying amounts that are then invested in index fund type equity portfolios. Such a passive investment option has worked to bring many people inexperienced with investment into the fold, by enabling them to access simple techniques such as dollar-cost averaging in a relatively ‘hands-free’ way. Micro-investing is thus an appealing option for those not inclined to invest themselves, because it facilitates disciplined, regular investment, while also removing many of the barriers faced when investing in managed funds, such as minimum amount requirements and high management fees. Naturally, micro-investing’s effect in bringing people previously unaccustomed into investment makes it a focus for fintech companies, as it allows them to access new funds under management from formerly untouched demographics like millennials and other young people who may be new to investing.
Raiz
Raiz is a micro-investment app that automatically rounds up users’ spending to the nearest dollar and invests the difference. An example would be if you purchased a $3.60 coffee, Raiz would round up the amount to $4 and invest the extra 40 cents in a pre-set investment vehicle. In addition to this, Raiz allows users to set recurring, periodic investments, whereby fixed amounts from a user’s checking account are invested at regular intervals. In terms of investment options, Raiz offers a wide array of in-house portfolios ranging from ‘conservative’ to ‘aggressive’ and comprising various combinations of stocks and bonds, while also offering external ETFs which users can set as their automatic investment option.
Passive micro-investing apps such as Raiz have had a profound effect in boosting the savings and investment rates of young people in particular. Such an uptake in these automated investment options has seen fintech companies like Raiz considerably change and destabilize the banking landscape, with the conventional investment systems being seemingly outdated relics when compared with the popularity of the new ultra-accessible, ‘set and forget’ micro-investing methods. Rather than step aside, however, this has seen the traditional banking sector adapt, highlighted in CBA launching its ‘CommSec Pocket’ app, which, like Raiz, allows users to set periodic, automatic investments of a fixed amount. It remains to be seen whether other banks follow suit, but regardless it is evident that micro-investing apps like Raiz have changed the investment landscape for good.
Spaceship
Spaceship Voyager is another player in this space. Similar to Raiz, Spaceship allows its users to set recurring investments on a weekly, fortnightly or monthly basis. Additionally, they have three portfolios to choose from: Spaceship Origin, Spaceship Universe and Spaceship Earth. Their origin portfolio consists primarily of the largest US companies. Their Universe portfolio consists of stocks that meet their ‘where the world is going criteria’, including companies such as Amazon and Google. Finally, their Earth portfolio consists of stocks who meet their sustainability criteria and have a positive impact on the environment. Spaceship users can invest in one or multiple portfolios depending on their preferences.
In addition to their investment opportunities, Spaceship also writes personal finance articles and links to other articles written by personal finance websites such as savings.com.au and A Wealth of Common Sense. This demonstrates their commitment to improving the financial literacy of their users, and is particularly important for the demographic they are targeting, namely people aged 18-29. They also conduct interviews of people who use their platform, asking them to share their experiences and importantly their mistakes when investing, enabling their users to learn from others.
Spaceship also takes care to highlight the risk of these portfolios, recommending a minimum investing period of seven years and encouraging its users to be in it for the long haul. This risk is also amplified for Australian investors, because Spaceship does not hedge its foreign currency exposure (which partly explains its low fees).
Raiz vs Spaceship
Both platforms have their advantages and disadvantages. For example, Raiz’s main feature - round up investing - is not offered by Spaceship, and thus Raiz might be more beneficial for people who struggle to commit to investing. Our research also suggests that Raiz has a greater degree of choice not just in the number of portfolios but the level of risk which those portfolio’s contain, whereas all of the Spaceship portfolios are aggressive and contain 100% equity. Perhaps this explains why Spaceship offers much lower fees, particularly for small balances, compared to Raiz and thus may still be worth considering. As mentioned above, Spaceship also makes personal finance topics such as budgeting and savings quite accessible from its app, so it’s great for young investors looking to learn about finance. Spaceship is also continuing to expand into other areas such as Super, and continues to release new features.
We would recommend doing further research on the pros and cons, and looking into other similar investing platforms, before making a decision. Before investing in any of these platforms it is important to understand their risk profile, and whether that suits your preferences. It is always important to understand your goals and time horizon before investing, and realize that when something sounds too good to be true, it usually is. With investing becoming more and more accessible, financial literacy is becoming more crucial than ever.
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References and Further Reading