Betterment’s recommended portfolio strategy is constructed using a two part process: asset allocation and fund selection. Explore the assets used in the Betterment Portfolio Strategy and which funds are currently represented.
Stocks
U.S. Total Stock Market
This set of holdings offers broad exposure to stocks in the U.S. Market. American companies represent a significant portion of developed market stocks, and when a portfolio is balances U.S. stocks with international developed market and emerging market stocks, it can attain greater diversification. U.S. stocks tend to correlate with other developed markets, but by purchasing these components separately, Betterment can more effectively control attributes of a given portfolio, such as risks, returns, and taxes.
VTI is the primary ETF used to gain exposure to the entire U.S. stock market. Our secondary ETFs, SCHB and ITOT, which also have low expense ratios, are highly correlated with VTI. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™.
U.S. Value Stocks - Large Cap
This set of holdings is one of three that offers exposure to value stocks of certain sizes. Size and value are two factor tilts of Betterment’s portfolio optimization that aim to drive higher expected returns. While stocks of good value and appropriate size exist in other geographic markets, Betterment expresses these portfolio tilts only in the U.S. because international funds with value and size tilts currently are too expensive to maintain Betterment’s low average costs. U.S. Large Cap stocks can be defined as those in the top 70% of the capitalization of the U.S. equity market. Value stocks are those that trade at a lower price relative to their dividends, earnings and/or sales than the average stock.
VTV is the primary ETF used to gain value stock exposure among companies with a large capitalization. Our secondary ETFs, SCHV and IVE, are highly correlated with VTV. SCHV has a similarly low expense ratio to VTV but lower liquidity, and IVE has a slightly higher expense ratio and liquidity. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™.
U.S. Value Stocks - Mid Cap
This set of holdings is one of three that allocates exposure to value stocks of certain sizes. Size and value are two factor tilts of Betterment’s portfolio optimization, which aims to drive higher expected returns. While stocks of good value and appropriate size exist in other geographic markets, Betterment expresses these portfolio tilts only in the U.S. to maintain low costs. U.S. Mid Cap stocks are typically defined as those companies with between $1 billion and $8 billion in market capitalization in the United States. Value stocks are those that trade at a lower price relative to their dividends, earnings and/or sales than the average stock.
VOE is the primary ETF used to gain value stock exposure among companies with a medium capitalization. Our secondary ETFs, IWS and IJJ, are highly correlated with VOE. VOE is the primary recommendation since it has the lowest expense ratio and tightest bid-ask spread. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™.
U.S. Value Stocks - Small Cap
This set of holdings is one of three that allocates exposure to value stocks of certain sizes. Size and value are two factor tilts of Betterment’s portfolio optimization that aims to drive higher expected returns. While stocks of good value and appropriate size exist in other geographic markets, Betterment expresses these portfolio tilts only in the U.S. to maintain low costs. U.S. Small Cap stocks typically grow at a faster pace than the typical company, and tend to represent an often-volatile segment of the market. Value stocks are those that trade at a lower price relative to their dividends, earnings and/or sales than the average stock.
VBR is the primary ETF used to gain value stock exposure among companies with a small capitalization. Our secondary ETFs, IWN and IJS are highly correlated with VBR. VBR is the primary recommendation since it has the lowest expense ratio. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™.
International Developed Market Stocks
This set of holdings offers exposure to a broad collection of stocks from non-U.S. developed markets such as the United Kingdom, the European Union, Japan, and others. Generally, developed market stocks have a similar risk and return profile as the U.S. Total Stock Market. Greater portfolio diversification can be achieved with allocations to emerging market stocks and bonds in addition to international developed market stocks.
VEA is the primary ETF used to gain exposure to international developed market stocks. Our secondary ETFs, SCHF and IEFA, are highly correlated with VEA. VOE is the primary recommendation since it has the lowest expense ratio and tightest bid-ask spread. The secondary ETFs enable Tax Loss Harvesting+™.
International Emerging Market Stocks
This set of holdings offers exposure to a broad collection of stocks from emerging markets, such as China, Taiwan, India, Brazil, Russia, Thailand, and South Africa, among others. International Emerging Market Stocks generally involve higher expected risk compared to Developed Market Stocks, but may lead to higher growth as developing states modernize and gain wealth. Emerging market stocks are less correlated with U.S. Stocks and other developed market stocks, which makes them an important part of a diversified portfolio.
VWO is the primary ETF used to gain exposure to stocks in international emerging markets. Our secondary ETFs, IEMG and SCHE, are highly correlated with VWO. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™.
Bonds
U.S. High Quality Bonds
U.S. High Quality Bonds provide exposure to the U.S. investment-grade bond market, bringing stability to portfolios, while offering higher cash income than U.S. Treasury bonds alone. The underlying bonds in this set of holdings have been rated no lower than BBB- by Standard and Poor’s, or Baa3 by Moody’s, minimizing credit risk. U.S. High Quality Bonds are still subject to interest rate risk. These bonds are offered by the U.S. government and high-quality U.S. corporations, and also could be comprised of mortgage-backed securities. The average bond maturity of the underlying bonds in this individual asset class is 8 years.
AGG is the primary ETF used to gain exposure to U.S. High Quality bonds, due to its low bid-ask spread. Our secondary ETF, BND, is similar to AGG but has a slightly higher bid-ask spread. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™ and Tax Coordination™.
U.S. Municipal Bonds
U.S. Municipal Bonds are only included in taxable portfolios, since the interest from them is generally federally tax-exempt. The underlying bonds are issued by state and regional governments to finance capital expenditures, such as infrastructure spending. While municipal bond credit risk is slightly higher than risk-free U.S. Treasuries, it still remains very low, which is attractive for risk-averse investors. This characteristic, coupled with favorable federal tax treatment, makes municipal bonds an excellent addition to taxable portfolios.
MUB is the primary ETF used to gain exposure to U.S. Municipal bonds, due to its relatively high liquidity. Our secondary ETF, TFI, is similar to MUB but has a slightly higher bid-ask spread. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™ and Tax Coordination™.
U.S. Inflation-Protected Bonds
U.S. Inflation Protected Bonds are issued by the U.S. Treasury with the value of the principal (but not interest payments) indexed to inflation. This set of holdings serves to insulate a part of the portfolio from the depreciating effects of inflation, while also offering historically low correlation with other types of bonds, helping to achieve greater diversification. Additional diversification in a bond portfolio adds a layer of protection during market downturns.
VTIP is the selected ETF used to gain exposure to U.S. Inflation-Protected Bonds due to its competitive bid-ask spread, low expense ratio, and robust asset base.
International Developed Market Bonds
International Bonds are issued by non-US developed market governments and organizations, largely in Europe and the Pacific regions. The bonds in this set of holdings have high credit quality and provide worldwide interest diversification for a bond portfolio, which helps to mitigate risk. These bonds are issued by a variety of countries and corporations to finance various spending needs, and the likelihood of default by these issuers is relatively low.
The selected ETF for International Developed Market Bonds is BNDX, due to its competitive expense ratio.
International Emerging Market Bonds
International Emerging Markets Bonds are dollar-denominated bonds issued by governments with economies that are rapidly growing and industrializing. This component offers higher expected returns than other types of bonds in the portfolio due to higher expected risk. Their unusually low correlation with other bonds results in higher risk-adjusted expected performance for the bond portion of a portfolio.
EMB is the primary ETF used to gain exposure to International Emerging Market Bonds, due to its low expense ratio, tight bid-ask spread, and high level of market liquidity. Our secondary ETFs, VWOB and PCY, are similar to EMB. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™.
U.S. Investment-Grade Corporate Bonds
U.S. Corporate Bonds are issued by corporations to finance business activities. U.S. Investment-Grade Corporate Bonds generally offer much more attractive yields and opportunities for capital appreciation to compensate investors for default risk. They also diversify the bond portion of a portfolio, resulting in higher risk-adjusted expected returns. The underlying bonds in this set of holdings have been rated no lower than BBB- by Standard and Poor’s, or Baa3 by Moody’s, minimizing credit risk. U.S. Investment-Grade Corporate Bonds are still subject to interest rate risk.
LQD is the primary ETF used to gain exposure to U.S. Investment-Grade Corporate Bonds, due to is tight bid-ask spread and stronger asset base. Our secondary ETFs, VCIT and ITR, are similar to LQD. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™ and Tax Coordination™.
U.S. Short-Term Treasury Bonds
U.S. Short-Term Treasury Bonds are issued by the U.S. Treasury with short maturity terms between one month and one year, offering extremely low risk exposure. Generally, U.S. Short-Term Treasury Bonds are considered a cash alternative, generating nominal benefit through interest payments. At lower stock allocations, these bonds help to decrease the risk of an overall portfolio.
The selected ETF for U.S. Short-Term Treasury Bonds is SHV, due to its competitive expense ratio.