When you deposit money with Betterment, every dollar is seamlessly invested in up to 12 different asset classes, optimized for your selected asset allocation.
You can see the full breakdown of the ETFs at each allocation by clicking here to read about our investment selection methodology.
Last Updated: June 15, 2016 10:09AM EDT
When you deposit money with Betterment, every dollar is seamlessly invested in up to 12 different asset classes, optimized for your selected asset allocation.
Last Updated: December 21, 2016 12:08PM ESTOur portfolio includes stock ETFs that efficiently capture the broad U.S. stock market, and international developed and emerging markets. Your money is invested in literally thousands of companies instantly. Exactly how much of your portfolio is made up of which stocks depends on the exact allocation you choose.
Our stock ETFs include:
US Total Stock Market - Vanguard U.S. Total Stock Market Index ETF (VTI)US Total Stock Market contains broad exposure to the entire US stock market, including growth and value companies of small, mid and large capitalizations. This asset class allows participation in the historically strong long-term growth of the US economy.
US Large-Cap Value Stocks - Vanguard US Large-Cap Value Index ETF (VTV)US Large-Cap Value stocks overlap with the US Total Stock Market, but are included to tilt the portfolio toward large-size companies with low price-to-earnings ratios. Value-tilting has historically resulted in outperformance, and also increases the portfolio's dividend yield.US Mid-Cap Value Stocks - Vanguard US Mid-Cap Value Index ETF (VOE)US Mid-Cap Value stocks overlap with the US Total Stock Market, but are included to tilt the portfolio towards companies medium size companies with low price-to-earnings ratios. Value-tilting has historically resulted in outperformance, and also increases the portfolio's dividend yield.US Small-Cap Value Stocks - Vanguard US Small-Cap Value Index ETF (VBR)US Small-Cap Value stocks overlap with the US Total Stock Market, but are included to tilt the portfolio towards companies small size companies with low price-to-earnings ratios. Value-tilting has historically resulted in outperformance, and also increases the portfolio's dividend yield.International Developed Stocks - Vanguard FTSE Developed Market Index ETF (VEA)Developed Markets stocks provide exposure to a diverse set of companies from international developed economies including the UK, Europe, Japan, and others. It has a similar risk/return profile as broad US stocks but with lower internal correlations as compared to the US market.Emerging Market Stocks - Vanguard FTSE Emerging Index ETF (VWO)Emerging Markets provide higher return potential and diversification, however it comes with higher risk compared to US or International Developed stocks. This asset helps your portfolio to grow with developing nations as they modernize and become wealthier.
Click each ETF's ticker symbol to visit the prospectus page. If you are having issues, please try a different web browser.Why these stock ETFs?
Our U.S. exposure covers the total U.S. market with a slight tilt towards value and small-cap stocks. The value and small-cap tilt has tended to beat the market in the long term, based on research by Nobel-prize winner Eugene Fama and Kenneth French.
By adding international stocks, we benefit from growth overseas in developed markets, including the U.K., Japan, and Europe, and achieve the same expected return with lower risk. With the emerging market stock ETF, we can capture growth in small but expanding markets such as Brazil, India, and China. This further diversifies our portfolio, and means we can reach higher expected return levels, especially at higher risk allocations.
Last Updated: December 21, 2016 11:43AM ESTOur portfolio includes bond ETFs that allow us to precisely manage the level of risk at every allocation, and improve the risk-adjusted performance of the portfolio at higher risk levels. The exact amounts of each bond ETF will depend on the allocation you choose. Our bond ETFs include:Click each ETF's ticker symbol to visit the prospectus pageShort-Term Treasuries - iShares Short-Term Treasury Bond Index ETF (SHV)Short-Term Treasuries have maturities between one month and one year. This extremely low-risk asset class is a cash alternative that generates nominal benefit through interest payments, and de-risks the portfolio at safer allocations.Inflation Protected Bond - Vanguard Short-term Inflation-Protected Treasury Bond Index ETF (VTIP)Inflation Protected Bonds are issued by the US Treasury with the value of the principal (but not interest payments) indexed to inflation. This allocation serves to insulate a part of the portfolio from the depreciating effects of inflation while also having historically low correlation with other asset classes.US High Quality Bonds (IRA and 401(k) accounts) - Vanguard US Total Bond Market Index ETF (BND)National Municipal Bonds (Taxable accounts)- iShares National AMT-Free Muni Bond Index ETF (MUB)US High Quality Bonds provide exposure to the US investment-grade bond market, bringing stability to the portfolio with higher income levels than US Treasuries. While the credit risk is very low, the average bond maturity of 7 years means there is some interest rate risk.Municipal Bonds are federally tax-exempt bonds issued by state and regional governments to finance capital expenditures. While municipal bond credit risk is slightly higher than US Treasuries, it is still quite low and coupled with favorable after-tax income makes them an excellent addition to taxable portfolios.US Corporate Bonds - iShares Corporate Bond Index ETF (LQD)International Market Bonds - Vanguard Total International Bond Index ETF (BNDX)US Corporate Bonds are issued by corporations to finance business activities. Corporate bonds generally offer much more attractive yields and opportunity for capital appreciation to compensate investors for default risk. They also diversify the fixed-income portfolio, resulting in higher risk-adjusted returns.International Bonds are issued by non-US developed market governments and organizations. They have high credit quality and provide interest rate diversification for a bond portfolio, resulting in higher risk-adjusted returns.Emerging Market Bond - iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)Emerging Markets Bonds are dollar-denominated bonds issued by governments with economies that are rapidly growing and industrializing. This asset class is higher risk but also offers a higher expected return than developed markets' bonds or US Treasuries. Their unusually low correlation with other bonds result in higher risk-adjusted performance for the portfolio.Why these bond ETFs?
These bonds ETFs allow us to choose a precise level of risk, and then get the best possible return at that level of risk by balancing four different growth factors: U.S. interest rate risk, U.S. company credit risk, international interest rate risk, and international credit risk. When applicable, we also consider the after-tax benefits of allocating to federally tax-exempt municipal bonds.
Taking on a higher exposure to any of these factors means higher expected returns, with higher potential for short-term losses. However, by blending them together intelligently, we can maintain the return level and reduce the severity of losses.
Last Updated: October 04, 2016 12:20PM EDTBetterment's portfolio is designed to keep up with the market and not under-perform, but it is not designed to beat the market. Beating the market is difficult to do with any certainty and involves a lot of risk.
Betterment is a strong believer in passive investing. The majority of the evidence shows that active management, whether by individual investors or fund managers, cause more harm than good in net-of-fee returns. We therefore invest in low-cost, passive investments which always seek to match the market's performance. You will never out-perform or beat the market on a risk-adjusted basis in your Betterment portfolio, but you'll also never under-perform or pay for a manager who under-performs either.
You can therefore expect market-matching risk-adjusted returns in our portfolios.
Last Updated: June 16, 2016 2:02PM EDTAll Betterment customers are invested into a globally diversified portfolio (with over 5,000 companies) of low-cost and liquid ETFs. Funds are invested into this portfolio according to your chosen allocation (depending on how much risk you want to take) and you can find the portfolio here.
Last Updated: November 30, 2016 5:55PM EST
Why rebalancing is necessary
Over time, the value of individual ETFs in a diversified portfolio move up and down, drifting away from their target weights. For example, over the long term, stocks generally rise faster than bonds, so the stock portion of your portfolio will go up relative to the bond portion - if you don’t rebalance. The difference between the target weights for your portfolio and the actual weights in your current portfolio is called drift.
Measuring Portfolio Drift
We define portfolio drift as the total absolute deviation of each asset class from its target, divided by two. Here’s a simplified example, with only four assets:
Total / 2
The target is 50% bonds and 50% stocks, and the current portfolio is at 50% stocks and 50% bonds. However, within the bond basket, US bonds are overweight by 5%, and International Bonds are underweight 5%. Similarly, US Stocks are overweight by 5%, and International Stocks are underweight by 5%.
Taking the absolute value of these deviations and adding them gives us a total of 20%. However, deviations are zero-sum, so including both overweights and underweights would be double-counting. Therefore, we divide by 2.
That gives us a total drift of 10%.
A high drift reduces the efficiency of your portfolio and may expose you to more (or less) risk than you intended when you set the target allocation.
Taking actions to reduce this drift is called rebalancing, which Betterment automatically does for you in several ways, depending on the circumstances, and always with an eye on tax efficiency.
Cash flow rebalancing
This method involves either buying or selling, but not both, and is preferable when cash flows into or out of the portfolio are happening anyway. Every cash flow (deposit, dividend reinvestment or withdrawal) is used to rebalance your portfolio. Fractional shares allow us to allocate these cash flows with precision to the penny.
Inflows: You are rebalanced whenever you make a deposit, including when you auto-deposit or receive dividends in your account. We use the inflow to buy the asset classes you are currently under-weight, reducing your drift. The result is that the need to sell in order to rebalance is reduced (and with sufficient inflows, eliminated completely). No sales means no capital gains, which means no taxes will be owed.
This method is so desirable that we’ve built it directly into your Portfolio tab. Whenever your drift is higher than normal (approximately 2% or higher), we calculate the deposit required to reduce your drift to zero, and make it easy for you to make the deposit.
Outflows: Outflows are likewise used to rebalance, by first selling asset classes which are overweight. (Once that is achieved, we sell all asset classes equally to keep you in balance.) We employ a sophisticated ‘lot selection’ algorithm called TaxMin within asset classes to minimize the tax impact as much as possible in taxable accounts.
In the absence of cash flows, we rebalance by selling and buying, reshuffling assets that are already in the portfolio. When cash flows are not sufficient to keep your portfolio’s drift within a certain tolerance, we sell just enough of the overweight asset classes, and use the proceeds to buy into the underweight asset classes to reduce the drift to zero.
Sell/Buy rebalancing is triggered whenever the portfolio drift reaches 3%. Our algorithms check your drift approximately once per day, and rebalance if necessary.
Note: In addition to the higher threshold, we built in another restriction into the rebalancing algorithm for taxable accounts. As with any sell trade, TaxMin selects the lowest tax impact lots, but stops before selling any lots that would realize short-term capital gains. Since short-term capital gains are taxed at a higher rate than long-term capital gains, we can achieve higher after-tax outcome by simply waiting for those lots to become long-term before rebalancing, if it’s still necessary at that point.
As a result, it’s possible for your portfolio to stay above the 3% drift if we have no long-term lots to sell. Almost always, it’s because the account is less than a year old. In this case, we recommend rebalancing via a deposit to avoid taxes. The Portfolio Tab will let you know how much to deposit, as described above.
Allocation Change Rebalancing
Rebalancing brings you back to your target allocation. Moving the slider in your goal does an allocation change, which changes that target. This sells securities and could possibly realize capital gains. Moreover, if you change your allocation even by 1%, you will be rebalanced entirely to match your new desired target allocation, regardless of tax consequences. As with all sell trades, we will utilize TaxMin to reduce the tax impact as much as possible.
If you’d like to turn off automated rebalancing so that Betterment only rebalances your portfolio in response to cash flows (i.e., deposits, withdrawals, or dividend reinvestments) and not by reshuffling assets already in the portfolio, please contact our customer support team - they will be happy to help you do this.
Last Updated: April 18, 2016 10:34AM EDTOur portfolios are made up of two parts: equity and bonds. Your expected returns very much depend on your asset allocation. To see the expected returns for your portfolio, please log into your account and view the Allocation tab.
You can see how a given blend would have performed historically by using our performance analysis tool. Use the "Add a Comparison" pulldown menu on the left hand side to compare against different allocations and benchmarks. We've also written about the past performance of a 70% stock portfolio.
Last Updated: February 27, 2015 5:30PM ESTAn exchange-traded fund (ETF) is a security that tracks an index, a commodity or a basket of assets just like an index fund, but trades like a stock on an exchange. ETFs track fairly closely to the indexes that they follow, such as the S&P 500 or the Dow Jones Industrial Average. ETFs are bought and sold like stocks throughout the day, and therefore experience continually changing prices. Betterment uses ETFs in both our stock and bond portfolios because of the liquidity, diversification, and low management fees they provide. For more information on the ETFs you are invested in with Betterment, please visit our portfolio page.
Last Updated: January 26, 2015 10:57AM ESTLike all market investments, the securities you own in your account are subject to market risk. If the markets are up, your balance will grow. When markets are down, your account can lose money. Fluctuations are especially hard to predict over the short term, but historic data shows that over the long-term your investment is likely to increase.
Last Updated: January 27, 2017 11:08AM ESTBetterment Securities provides brokerage services to all Betterment customers. Betterment Securities is a member of the Securities Investor Protection Corp (SIPC), which means that the securities in your account are protected up to $500,000 per individual account type (account types you can have at Betterment include: Traditional IRA, Roth IRA, SEP IRA, Joint Account, Trust Account, Personal Taxable Account).
For details, please see www.sipc.org. Unlike FDIC insurance for banks, SIPC does not protect against loss of principal due to movements in the market value of your securities.
Last Updated: June 16, 2016 2:03PM EDT
When you are thinking about buying an ETF, the Expense Ratio is pretty much all you need to know. ETF managers make money by deducting the annual expenses from the dividends they pay out through the year, and they tell you in advance how much that will be. There are no costs to buy or sell ETFs, and no hidden expenses. If you trade through a broker, the broker will charge you a commission to execute the transaction for you. Betterment covers these transactions for you.
Open-end mutual funds have purchase and redemption fees. These fees range from 0.25 percent to 2 percent and are charged by the fund to buy shares or to sell shares within a specified (usually short) period of time. Purchase and redemption fees differ from a commission because the money goes back into the fund rather than to a broker. These fees are meant to discourage short-term market-timing.
Mutual funds also have internal trading fees which are not disclosed on top of the stated fee. They are estimated to range from 0.11% of assets to 2%, with an average of 1.44%. The Wall Street Journal has a good primer on this issue. Many passive index mutual funds’ undisclosed trading fees are likely quite low, but they are non-zero, so that's something to consider when doing a pure cost comparison.
Last Updated: January 12, 2017 4:26PM ESTMany customers use the great tools provided for free by Google Finance and Yahoo Finance to track their investments and may have noticed that some charts do not always match up to our benchmark data. In the Betterment Analysis tab, we provide several tickers for comparison to your portfolio, like SPY (SP&P 500 ETF) and BND (Vanguards Total Bond ETF). We use the adjusted return data when graphing this data, which means it has been adjusted for stock splits and dividends. This most closely matches what Betterment does in our portfolio (re-invests dividends) so it's the best way to compare.
If you look at the returns graphs for these tickers on Yahoo or Google finance, you should be aware that they use straight price returns which do not include the dividend adjustments (so they typically will be lower). If you download their historical data and manually graph the adjusted price returns, you will see they match Betterment's Analysis graphs.
Hopefully this helps with any questions, but always feel free to contact us for more info or if you're still not seeing the data match up.
Last Updated: June 16, 2016 2:02PM EDTIt’s easy to quickly get deep into the weeds here, but strictly speaking, even a “tax efficient” mutual fund (which could mean a number of things) is not necessarily as tax efficient as an ETF.
- When you own a share of an ETF, you directly hold a single security directly for tax purposes, and you're in control of events that trigger tax consequences (primarily, selling it).
- When you own a share of a fund, a number of circumstances you have no control over can trigger taxable events for you. The fund manager may choose to sell some underlying securities to rebalance or otherwise readjust the index, or investors other than yourself can withdraw, forcing the manager to sell in a way that can have tax consequences for you, even though you haven't sold anything.
A manager of a “tax efficient” fund presumably seeks to minimize such outcomes, but it may not always be under his control either.
Last Updated: June 15, 2016 10:18AM EDT
Betterment constructs globally diversified strategic asset allocation portfolios appropriate for an investor's goals and time horizon. Each portfolio is selected as the result of a systematic portfolio optimization process that simultaneously balances forecasts for long-run expected returns for each asset class against both historical and forward-looking downside behavior for the portfolio as a whole.
In forecasting expected returns, we utilize the Black-Litterman Global Portfolio Optimization model to appropriately marry market expectations extracted from historical performance and current price levels with Betterment's views on long-run asset class behavior and correlations. Our advice is based on expected returns as well as downside risk and uncertainty as measured by historical episodes of underperformance and simulated stress tests of the asset performance. The result is a portfolio that provides an optimal blend of asset class exposures across different economic regions, investment styles and security types to deliver the best possible risk-adjusted returns for every level of risk.
The long-term performance of a portfolio can be negatively impacted by interest rates and inflation. Our fully diversified global portfolio helps smooth out the impact of these factors since different areas of the world experience them at different times and with varying severity. Our portfolio also avoids a common behavioral error of investors called home-bias, or the tendency to own companies from the country you live in.
To see the Betterment portfolio's efficient frontier compared to less robust alternatives, read more about our portfolio optimization.
Last Updated: June 15, 2016 10:17AM EDTExpense ratios are fees that mutual funds, exchange-traded funds (ETFs), closed-end funds and money market funds charge their shareholders. This fee is called a ratio because it is quoted as a percentage of assets per year, e.g. 0.85%. The expense ratio includes the administration, operating, legal costs involved in managing the fund, and sometimes marketing costs (“12b-1 fees”) to distribute the fund.
The expense ratio is important to consider when you invest in a fund. Even though you will never see a deduction of this fee from your account, you are still paying this fee. It is built into the price of the fund, so it accrues daily, and is proportional to your investment in the fund. Therefore, this expense directly impacts your return in the fund -- and ultimately your wealth.
Some asset classes are inherently more expensive than others. For example, U.S. stock funds generally have a lower expense ratio than international stock funds, because the underlying assets are more expensive to obtain. So it’s important to compare the expense ratio of a fund with the cost of other funds by other providers in its asset class. Also note that the strategy of the fund will affect its expense ratio as well. Passively managed index funds will have lower expense ratios than actively managed funds, despite their typically better net-of-fee performance.
Some mutual funds have different share classes, each with their own expense ratio and also minimum investment. For example, the Vanguard Total Stock Market Fund Investor Share Class (VTSMX) has an expense ratio of 0.17% (minimum investment $3,000), but the Admiral Share Class (VTSAX) has an expense ratio of 0.05% (minimum investment $10,000).
Typically ETFs have lower expense ratios than mutual funds. This is one of the main reasons, along with better tax efficiency and no minimum balances, that Betterment utilizes exchange traded funds in its portfolio. For the Vanguard Total Stock Market Fund example above, the ETF equivalent (VTI) costs 0.05% like the Admiral shares but has no minimum at all.
Last Updated: June 15, 2016 10:15AM EDT
How to transition your taxable account to Betterment, tax-efficiently
Transitioning assets from one taxable account to another should be done with care in order to avoid unnecessary taxes. Use the strategies below to transition a portfolio to Betterment. We recommend speaking with a tax advisor if you have questions about your specific tax implications.
Get the information you need
Using your account statements or information directly from your brokerage’s website, determine the holding period (based on purchase date) and tax basis (usually, the purchase price) of your current portfolio holdings. This is often available as a “cost basis report” or “gain/loss report”.
Holdings that are currently worth less than they were purchased for are in a loss, and selling these should not realize taxable gains. In fact, they may provide a tax benefit by offsetting other gains and up to $3,000 of ordinary income. Start by selling these first.
If you are selling the same ETFs as the ones in Betterment’s portfolio (or a fund that tracks the same index as one of our funds), wait 30 days after selling before depositing the cash to Betterment to avoid rebuying the same ETFs and potentially incurring a wash sale.
Transfer ETFs to Betterment
If you have ETFs with gains, you may be able to transfer them in-kind to your Betterment account, which avoids sale and any associated taxes. We support any ETF currently in the Betterment portfolio and potentially others. Please contact our customer service team if you’d like to do a transfer.
Manage taxes on capital gains
For any securities held more than one year, you will likely qualify for preferential tax treatment when you sell them You can sell these to offset any available losses taken or harvested in a year and pay no tax. After that, you can control the gains you realize each year by selling specific amounts. You’ll want to review your entire income tax picture and ensure you are not increasing your tax by moving into a new tax bracket solely due to the realized gains from the sale (as opposed to getting a raise at work). Also make sure that you have the money set aside to pay the taxes—there is no withholding on capital gains, like there is with ordinary wages.
Even if you pay some taxes in the current year, this decision can be worth it if you are saving on fees, or future taxes in the form of mutual fund capital gains distributions (all else being equal, ETFs are generally less likely to make such distributions) Use our Tax Switch Calculator to compare the break-even point.
Hold short-term gains
If you can’t offset all short and long-term gains with other losses, hold on to securities with embedded gains purchased a year ago or less, since these are taxed at a higher rate. For the majority of taxpayers, gains on investments held for a year or less are taxed at the same marginal rate as your ordinary income, the highest rate. Gains on investments held for more than a year are taxed at a lower rate than the short-term capital gains rate.
Moving the cash to Betterment
After executing the above strategies, you’ll have any uninvested cash and sale proceeds in your brokerage account. Transfer this to the bank account linked to your Betterment account, and log in to your Betterment account to make a deposit or set up auto-deposit.
Last Updated: February 17, 2016 11:57PM ESTCash in your investment account could be lowering your returns (learn why). Note we aren't talking about checking, savings or emergency funds here. Cash in an investment account usually arises from dividends that aren't re-invested, rebalance stalemates where you never finish your work, or just from being scared if "now is a good time to buy".
Betterment is designed to avoid all of these issues, so it's the best way to make sure you never have idle cash, and that all of your money is working towards your future goals.
If you are still worried about if now is a good time to invest, you might consider doing it over time. Set a plan in place, then use technology to make sure you stick to it. Betterment can automate this for you with automatic deposits. While the math shows that not waiting to invest cash is better in the long term, we are OK with a strategy that makes you feel comfortable and gets you there eventually - like Dollar Cost Averaging. Read about Dollar Cost Averaging
I live in California or New York and have a taxable account. Can I have state-specific municipal bonds in my portfolio?Last Updated: November 30, 2016 6:03PM ESTWhile the standard Betterment portfolio for taxable accounts utilizes MUB, a bond ETF providing exposure to national municipal bonds, Betterment offers the CMF (for CA customers) and NYF (for NY customers) ETFs, which provide exposure to California municipal bonds and New York municipal bonds, respectively, in lieu of MUB for customers with a minimum balance of, or intent to fund, at least $100,000. We hope to offer this feature to all customers in the future.
State-specific municipal bonds are generally advantageous for those in high-income tax brackets. For more background on when it might make sense to invest in local municipal bonds, please see the following article, Muni Bond Exposure: When Does It Make Sense to Go Local? To switch out MUB in your portfolio to CMF or NYF, please contact us at email@example.com. We generally recommend making this switch before you fund your account, but if your account is funded, we will sell you out of MUB over time in a way that attempts to minimize realizing any taxable gains for you.