The latest update to our Core portfolio strategy

The latest update to our Core portfolio strategy Jan 2, 2024 10:38:57 AM Learn more about the changes we believe will help improve long-term risk-adjusted returns. Betterment serves as a fiduciary, acting in our clients’ best interests. We monitor our portfolios and review the underlying investments on a regular basis to optimize portfolios and help you achieve your investment goals. As part of this process, we’ve made changes to our Core portfolio strategy that we believe will help improve long-term risk-adjusted returns. How we evaluate and manage our portfolios The Betterment Investment Committee monitors and reviews the underlying inputs used to construct our portfolios, including running simulations to gauge expected long-term performance. Our capital market assumptions (CMAs) represent our long-term expectations for the return and risk of various asset classes. These CMAs help inform how we allocate across different asset classes in our portfolios, and power our platform’s advice tools What’s changed in the Core portfolio? Our updated CMAs indicate a shift in the expected risk-return profile of certain asset classes, suggesting a reallocation of target exposures with the Core portfolio going forward. Here’s what that means: Within our equities basket Dialed down exposure to emerging markets stocks while increasing exposure to U.S. stocks. With increasing geopolitical risks, we believe this shift can help reduce potential losses, especially for portfolios holding fewer stocks relative to bonds. This change also brings us closer to MSCI All Country World Index (MSCI ACWI, our stock allocation benchmark as described below) Reduced the emphasis on U.S. value stocks (“value tilt”), shifting toward U.S. stock exposure weighted by market capitalization. Over time, we’ve observed gradual compression in the value factor premium as markets have become more efficient. We expect this adjustment to help reduce risk and more closely align the Core portfolio with our custom benchmark indices (described below). Within our fixed income basket Reduced exposure to both emerging markets and international developed bonds, while increasing exposure to U.S. bonds. Similar to our stock allocations, we expect this to mitigate potential downside risk for more conservative allocations. Increased allocations to inflation-protected U.S. bonds. This update will help shield clients with more conservative portfolios from potential erosion risk on savings—providing protection against market drawdowns, rising interest rates, and other macroeconomic events that could have negative short-term consequences. This change can be particularly relevant for customers in retirement, since inflation can meaningfully eat away at the value of your money over time. Developing a “benchmark aware” portfolio strategy In an evolution of our investment process, we’ve also updated our Core portfolio construction methodology to become more “benchmark aware.” This means we now calibrate our exposures based on a custom benchmark. The custom benchmark we have selected is composed of (1) the MSCI All Country World Index (MSCI ACWI), (2) the Bloomberg Global Aggregate Bond index, and (3) at low risk levels, the ICE US Treasury 1-3 Year Index. This custom benchmark has varying risk levels that correspond to the Core portfolio allocations we support for a variety of investor risk tolerances. Introducing the Value Tilt portfolio strategy For customers who favor the potential benefits and associated risks in value investing, we’re introducing a new portfolio option: Value Tilt. The Value Tilt portfolio strategy maintains the same historical track record as the Core portfolio strategy, up until the 2024 changes where this becomes a new strategy. While this portfolio includes the same thematic asset allocation changes as the Core portfolio strategy, it maintains explicit weighting towards U.S. value stocks. An expansion of our portfolio options, Value Tilt is available for all goals, new and old. You can select it within your account. What does all this mean for you? No action is required from you to transition to the updated Core portfolio allocations. We’ll manage your Core portfolio tax-efficiently and put your cash flows (such as deposits, withdrawals, dividends, contributions, and distributions) to work to assist with the transition, moving your portfolio towards the updated target allocation. Our algorithms will automatically work to reduce any drift between your positions and the updated target allocation, by (1) first purchasing those funds where your portfolio is underweight when investing dividends and deposits and (2) first selling those funds where your portfolio is overweight, when generating cash for withdrawals. If you’ve enabled tax loss harvesting, we’ll use those opportunities to reduce drift as well. We do not expect any tax impact in IRAs, 401(k)s, and HSAs. Considering potential tax impact For taxable goals, while the trade-off between expected returns and tax impact is unique to each client (and depends on factors such as your investing time horizon and financial situation), most customers should see minimal changes to their taxes as a result of this transition. That’s because we’re taking a gradual approach with the portfolio migration and using cash flows to transition taxable accounts. If you would rather be invested in one of our other managed ETF portfolio strategies or wish to have value exposure in your portfolio, you have the option of selecting any of these strategies, along with the Value Tilt portfolio, on our platform. Betterment is regularly monitoring your investments so that you don’t have to. Learn more about our investment philosophy and process.