Portfolios

Make Your Money Hustle: Bond Investing Explore how bonds can diversify your investments, filling the gap between cash and stocks. Bonds can be confusing, but we’re here to simplify them. Here’s the TL;DR: Bonds are loans you give to companies or governments who pay you back with interest. Bonds generally earn more return than high-yield savings accounts while taking on less risk than stocks. Bonds can be bought through several sources, including a broker, the U.S. government, or a diversified ETF like the multiple bond portfolios offered by Betterment. Congrats—you made it past the TL;DR. Next, we’ll dive deeper into how bonds may be able to bring balance to your investments, filling the gap between cash and stocks. In just a few minutes, you’ll walk away knowing: The basics of bonds The benefits of investing in bonds An easy way to buy bonds As interest rates begin to drop, bonds may be a good way to earn extra yield. The basics of bonds No need to read a book about bonds—here are three Q&As that give you the basics. Question 1: What is a bond? Answer: A bond is basically a loan that you provide to an entity such as a business or government that wants to raise money. You can buy and hold a bond directly from the issuer (e.g. buying US Treasury bonds from TreasuryDirect) or choose to buy and sell bonds on the secondary market (e.g. an online broker). Question 2: How does a bond work? Answer: After you “loan” your money to the entity issuing the bond, they agree to: Pay back your principal: The issuer promises to pay your initial money back, aka your principal, by a specified date called the bond’s maturity. Pay you interest: You’ll receive periodic interest payments based on the annual interest rate paid on a bond, called the coupon rate. These interest payments are either distributed to you or reinvested into your investment on a consistent schedule. Question 3: Are there risks to bond investing? Answer: Generally, bonds are less risky than stocks, but that doesn't mean they are without risk. Examples of these risks include: Credit risk: There’s a chance that a bond issuer won’t pay you back. Interest rate risk: There is a chance that the value of the bond will go down as interest rates go up. Long-term bonds have greater interest rate risk than short-term bonds. Most bonds are rated based on the bond issuer's financial strength and ability to pay a bond's principal and interest. Like stock investments, bonds with less risk offer less potential for return (aka lower yields). Less risky bonds include higher-quality bonds (more likely to be paid on time) or bonds with shorter maturities (length until full repayment). The benefits of investing in bonds For investors looking to put some of their cash to work but not wanting to go all-in on the stock market, here are three benefits that bonds can offer, making them complementary to cash and stock. 1) Bonds can help you avoid market volatility Unlike stocks, bonds don’t represent a share of ownership in a company. Because of this, you won’t see the value of a bond increase as much as a stock when a company grows, but you generally also won’t see it decrease as much as a stock when a company struggles. 2) Bonds can help you preserve wealth Bonds, especially short-maturity bonds, can be a good choice to help preserve your money while potentially earning more return than cash in a traditional savings account, money market account, or CD. 3) Bonds can help you generate income Because the entity issuing a bond typically pays the bondholder interest on some regular schedule, they can help generate consistent income with less risk than stock investing. An easy way to buy bonds Most bonds don't trade directly on centralized markets like stocks, making it more challenging to invest in individual bonds. You can buy individual bonds from a broker or directly from the US government, but both of those options require DIY knowledge and time to build a diversified portfolio. An easy way to invest in a diversified portfolio of bonds is to invest in a bond ETF. A bond ETF, or exchange-traded fund, trades on stock exchanges, like a stock ETF. In one purchase, a bond ETF offers investors a way to gain exposure to a diversified portfolio of bonds, which can include government, municipal, corporate, and international bonds. Bond ETFs aim to provide regular income through interest payments from the underlying bonds and offer the flexibility of buying and selling shares on an exchange throughout the trading day. Make your money hustle with a Betterment bond portfolio We’ve created two types of bond portfolios with different needs in mind: BlackRock Target Income portfolios What is it? The portfolios include a diverse set of bond ETFs with a range of risk levels, helping to mitigate exposure to volatility in the stock market, aiming to preserve wealth, while seeking to generate income. Who is it for? These portfolios may be better suited for investors looking for lower risk compared to stocks, with the option to choose one of four portfolio strategies targeting increasingly higher yields. The portfolio strategy should be selected based on your risk tolerance. Keep in mind, getting more income from a specific target portfolio also means taking on more risk. Goldman Sachs Tax-Smart Bonds portfolio What is it? This portfolio is built by Goldman Sachs using 100% short-term bond ETFs. Betterment then personalizes the portfolio based on your tax situation with the aim of generating after-tax yield. Who is it for? The portfolio is designed for higher-income individuals, especially in the 32% or greater federal tax bracket, looking for a potentially higher after-tax yield than a cash account with less risk than a traditional stock-and-bond investing portfolio. In both portfolios, all interest payments, also called dividends, are automatically reinvested to help grow the portfolio’s value. Ready to be invested? We make it simple to invest in a bond portfolio with three options: Make a one-time deposit. Set up recurring deposits from Betterment Checking or an external account. Schedule recurring transfers from your Betterment Cash Reserve account.

The latest update to our Core portfolio strategy 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.

The Betterment Core portfolio strategy We continually improve our portfolio construction methodology over time in line with our research-focused investment philosophy. TABLE OF CONTENTS Introduction Global Diversification and Asset Allocation Portfolio Optimization Tax Management Using Municipal Bonds The Value Tilt Portfolio Strategy Innovative Technology Portfolio Strategy Conclusion Citations I. Introduction Betterment builds investment portfolios designed to help you make the most of your money so you can live the life you want. Our investment philosophy forms the basis for how we pursue that objective: Betterment uses real-world evidence and systematic decision-making to help increase our customers’ wealth. In building our platform and offering individualized advice, Betterment’s philosophy is actualized by our five investing principles. Regardless of one’s assets or specific situation, Betterment believes all investors should: Make a personalized plan. Build in discipline. Maintain diversification. Balance cost and value. Manage taxes. To align with Betterment’s investing principles, a portfolio strategy must enable personalized planning and built-in discipline for investors. The Betterment Core portfolio strategy contains 101 individualized risk levels (each with a different percentage of the portfolio invested in stocks vs. bonds, informed by your financial goals, time horizon and risk tolerance), in part, because that level of granularity in allocation management provides the flexibility to align to multiple goals with different timelines and circumstances. In this guide to the Betterment Core portfolio strategy construction process, our goal is to demonstrate how the methodology, in both its application and development, embodies Betterment’s investing principles. When developing a portfolio strategy, any investment manager faces two main tasks: asset class selection and portfolio optimization. Fund selection is also guided by our investing principles, and is covered separately in our Investment Selection Methodology paper. II. Global Diversification and Asset Allocation An optimal asset allocation is one that lies on the efficient frontier, which is a set of portfolios that seek to achieve the maximum objective for any given feasible level of risk. The objective of most long-term portfolio strategies is to maximize return for a given level of risk, which is measured in terms of volatility—the dispersion of those returns. In line with our investment philosophy of making systematic decisions backed by research, Betterment’s asset allocation is based on a theory by economist Harry Markowitz called Modern Portfolio Theory.1 A major tenet of Modern Portfolio Theory is that any asset included in a portfolio should not be assessed by itself, but rather, its potential risk and return should be analyzed as a contribution to the whole portfolio. Modern Portfolio Theory seeks to maximize expected return given an expected risk level or, equivalently, minimize expected risk given an expected return. Other forms of portfolio construction may legitimately pursue other objectives, such as optimizing for income, or minimizing loss of principal. Asset Classes Selected for Betterment’s Core Portfolio Strategy The Betterment Core portfolio strategy’s asset allocation starts with a universe of investable assets, which for us could be thought of as the “global market portfolio.”2 To capture the exposures of the asset classes for the global market portfolio, Betterment evaluates available exchange-traded funds (ETFs) that represent each class in the theoretical market portfolio. We base our asset class selection on ETFs because this aligns portfolio construction with our investment selection methodology. Betterment’s portfolios are constructed of the following asset classes: Equities U.S. equities International developed market equities Emerging market equities Bonds U.S. short-term treasury bonds U.S. inflation-protected bonds U.S. investment-grade bonds U.S. municipal bonds International developed market bonds Emerging market bonds We select U.S. and international developed market equities as a core part of the portfolio. Historically, equities exhibit a high degree of volatility, but provide some degree of inflation protection. Even though significant historical drawdowns, such as the global financial crisis in 2008 and pandemic outbreak in 2020, demonstrate the possible risk of investing in equities, longer-term historical data and our forward expected returns calculations suggest that developed market equities remain a core part of any asset allocation aimed at achieving positive returns. This is because, over the long term, developed market equities have tended to outperform bonds on a risk-adjusted basis. To achieve a global market portfolio, we also include equities from less developed economies, called emerging markets. Generally, emerging market equities tend to be more volatile than U.S. and international developed equities. And while our research shows high correlation between this asset class and developed market equities, their inclusion on a risk-adjusted basis is important for global diversification. Note that Betterment excludes frontier markets, which are even smaller than emerging markets, due to their widely varying definition, extreme volatility, small contribution to global market capitalization, and cost to access. The Betterment Core portfolio strategy incorporates bond exposure because, historically, bonds have a low correlation with equities, and they remain an important way to dial down the overall risk of a portfolio. To promote diversification and leverage various risk and reward tradeoffs, the Betterment Core portfolio strategy includes exposure to several asset classes of bonds. Asset Classes Excluded from the Betterment Core Portfolio Strategy While Modern Portfolio Theory would have us craft a portfolio to represent the total market, including all available asset classes, we exclude some asset classes whose cost and/or lack of data outweighs the potential benefit gained from their inclusion. The Betterment Core portfolio construction process excludes commodities and natural resources asset classes. Specifically, while commodities represent an investable asset class in the global financial market, we have excluded commodities ETFs because of their low contribution to a global stock/bond portfolio's risk-adjusted return. In addition, real estate investment trusts (REITs), which tend to be well marketed as a separate asset class, are not explicitly included in the Core portfolio strategy. Betterment does provide exposure to real estate, but as a sector within equities. Adding additional real estate exposure by including a REIT asset class would overweight the exposure to real estate relative to the overall market. Incorporating awareness of a benchmark Before 2024, we managed the Core portfolio strategy in a “benchmark agnostic” manner, meaning we did not incorporate consideration of global stock and bond indices in our portfolio optimization, though we have always sought to optimize the expected risk-adjusted return of the portfolios we construct for clients. The “risk” element of this statement represents volatility and the related drawdown potential of the portfolio, but it could also represent the risk in the deviation of the portfolio’s performance relative to a benchmark. In an evolution of our investment process, in 2024 we updated our portfolio construction methodology to become “benchmark aware,” as we now calibrate our exposures based on a custom benchmark that expresses our preference for diversifying across global stocks and bonds. A benchmark, which comes in the form of a broad-based market index or a combination of indices, serves as a reference point when approaching asset allocation, understanding investment performance, and aligning the expectations of portfolio managers and clients. In our case, we created a custom benchmark that most closely aligns with our future expectations for global markets. The custom benchmark we have selected is composed of (1) the MSCI All Country World stock index (MSCI ACWI), (2) the Bloomberg Global Aggregate Bond index, and (3) at low risk levels, the ICE US Treasury 1-3 Year Index. Our custom benchmark is composed of 101 risk levels of varying percentage weightings of the stock and bond indexes, which correspond to the 101 risk level allocations in our Core portfolio. At low risk levels (allocations that are less than 40% stocks), we layer an allocation to the ICE US Treasury 1-3 Year index, which represents short-term bonds, into the blended benchmark. We believe that incorporating this custom benchmark into our process reinforces the discipline of carefully evaluating the ways in which our portfolios’ performance could veer from global market indices and deviate from our clients’ expectations. We have customized the benchmark with 101 risk levels so that it serves clients’ varying investment goals and risk tolerances. As we will explore in the following section, establishing a benchmark allows us to apply constraints to our portfolio optimization that ensures the portfolio strategy’s asset allocation does not vary significantly from the geographic and market-capitalization size exposures of a sound benchmark. Our benchmark selection also makes explicit that the portfolio strategy delivers global diversification rather than the more narrowly concentrated and home-biased exposures of other possible benchmarks such as the S&P 500. III. Portfolio Optimization As an asset manager, we fine-tune the investments our clients hold with us, seeking to maximize return potential for the appropriate amount of risk each client can tolerate. We base this effort on a foundation of established techniques in the industry and our own rigorous research and analysis. While most asset managers offer a limited set of model portfolios at a defined risk scale, the Betterment Core portfolio strategy is designed to give customers more granularity and control over how much risk they want to take on. Instead of offering a conventional set of three portfolio choices—aggressive, moderate, and conservative—our portfolio optimization methods enable the Core portfolio strategy to contain 101 different risk levels. Optimizing Portfolios Modern Portfolio Theory requires estimating variables such as expected-returns, covariances, and volatilities to optimize for portfolios that sit along an efficient frontier. We refer to these variables as capital market assumptions (CMAs), and they provide quantitative inputs for our process to derive favorable asset class weights for the portfolio strategy. While we could use historical averages to estimate future returns, this is inherently unreliable because historical returns do not necessarily represent future expectations. A better way is to utilize the Capital Asset Pricing Model (CAPM) along with a utility function which allows us to optimize for the portfolio with a higher return for the risk that the investor is willing to accept. Computing Forward-Looking Return Inputs Under CAPM assumptions, the global market portfolio is the optimal portfolio. Since we know the weights of the global market portfolio and can reasonably estimate the covariance of those assets, we can recover the returns implied by the market.3 This relationship gives rise to the equation for reverse optimization: μ = λ Σ ωmarket Where μ is the return vector, λ is the risk aversion parameter, Σ is the covariance matrix, and ωmarket is the weights of the assets in the global market portfolio.5 By using CAPM, the expected return is essentially determined to be proportional to the asset’s contribution to the overall portfolio risk. It’s called a reverse optimization because the weights are taken as a given and this implies the returns that investors are expecting. While CAPM is an elegant theory, it does rely on a number of limiting assumptions: e.g., a one period model, a frictionless and efficient market, and the assumption that all investors are rational mean-variance optimizers.4 In order to complete the equation above and compute the expected returns using reverse optimization, we need the covariance matrix as an input. This matrix mathematically describes the relationships of every asset with each other as well as the volatility risk of the assets themselves. In another more recent evolution of our investment process, we also attempt to increase the robustness of our CMAs by averaging in the estimates of expected returns and volatilities published by large asset managers such as BlackRock, Vanguard, and State Street Global Advisors. We weight the contribution of their figures to our final estimates based on our judgment of the external provider’s methodology. Constrained optimization for stock-heavy portfolios After formulating our CMAs for each of the asset classes we favor for inclusion in the Betterment Core portfolio strategy, we then solve for target portfolio allocation weights (the specific set of asset classes and the relative distribution among those asset classes in which a portfolio will be invested), with the range of possible solutions constrained by limiting the deviation from the composition of the custom benchmark. To robustly estimate the weights that best balance risk and return, we first generate several thousand random samples of 15 years of expected returns for the selected asset classes based on our latest CMAs, assuming a multivariate normal distribution. For each sample of 15 years of simulated expected return data, we find a set of allocation weights subject to constraints that provide the best risk-return trade-off, expressed as the portfolio’s Sharpe ratio, i.e., the ratio of its return to its volatility. Averaging the allocation weights across the thousands of return samples gives a single set of allocation weights optimized to perform in the face of a wide range of market scenarios (a “target allocation”). The constraints are imposed to make the portfolio weights more benchmark-aware by setting maximum and minimum limits to some asset class weights. These constraints reflect our judgment of how far the composition of geographic regions within the portfolio’s stock and bond allocations should differ from the breakdown of the indices used in the benchmark before the risk of significantly varied performance between the portfolio strategy and the benchmark becomes untenable. For example, the share of the portfolio’s stock allocation assigned to international developed stocks should not be profoundly different from the share of international developed stocks within the MSCI ACWI. We implement caps on the weights of emerging market stocks and bonds, which are often projected to have high returns in our CMAs, and set minimum thresholds for U.S. stocks and bonds. This approach not only ensures our portfolio aligns more closely with the benchmark, but it also mitigates the risk of disproportionately allocating to certain high expected return asset classes. Constrained optimization for bond-heavy portfolios For versions of the Core portfolio strategy that have more than or equal to 60% allocation to bonds, the optimization approach differs in that expected returns are maximized for target volatilities assigned to each risk level. These volatility targets are determined by considering the volatility of the equivalent benchmark. Manually established constraints are designed to manage risk relative to the benchmark, instituting a declining trend in emerging market stock and bond exposures as stock allocations (i.e., the risk level) decreases. Meaning that investors with more conservative risk tolerances have reduced exposures to emerging market stocks and bonds because emerging markets tend to have more volatility and downside-risk relative to more established markets. Additionally, as the stock allocation percentage decreases, we taper the share of international and U.S. aggregate bonds within the overall bond allocation, and increase the share of short-term Treasury, short-term investment grade, and inflation-protected bonds. This reflects our view that investors with more conservative risk tolerances should have increased exposure to short-term Treasury, short-term investment grade, and inflation-protected bonds relative to riskier areas of fixed income. The lower available risk levels of the Core portfolio strategy demonstrate capital preservation objectives, as the shorter-term fixed income exposures likely possess less credit and duration risk. Clients invested in the Core portfolio at conservative allocation levels will likely therefore not experience as significant drawdowns in the event of waves of defaults or upward swings in interest rates. Inflation-protected securities also help buffer the lower risk levels from upward drafts in inflation. IV. Tax Management Using Municipal Bonds For investors with taxable accounts, portfolio returns may be further improved on an after-tax basis by utilizing municipal bonds. This is because the interest from municipal bonds is exempt from federal income tax. To take advantage of this, the Betterment Core portfolio strategy in taxable accounts is also tilted toward municipal bonds because interest from municipal bonds is exempt from federal income tax, which can further optimize portfolio returns. Other types of bonds remain for diversification reasons, but the overall bond tax profile is improved by tilting towards municipal bonds. For investors in states with some of the highest tax rates—New York and California—Betterment can optionally replace the municipal bond allocation with a more narrow set of bonds for that specific state, further saving the investor on state taxes. Betterment customers who live in NY or CA can contact customer support to take advantage of state specific municipal bonds. V. The Value Tilt Portfolio Strategy Existing Betterment customers may recall that historically the Core portfolio strategy held a tilt to value companies, or businesses that appear to be potentially undervalued based on metrics such as price to earnings ratios. The latest iteration of the Core portfolio strategy, however, has deprecated this explicit tilt that was expressed via large-, mid-, and small-capitalization U.S. value stock ETFs, while maintaining some exposure to value companies through broad market U.S. stock funds. We no longer favor allocating to value stock ETFs within the Core portfolio strategy in large part as a result of our adoption of a broad market benchmark, which highlights the idiosyncratic nature of such tilts, sometimes referred to as “off benchmark bets.” We believe our chosen benchmark that represents stocks through the MSCI ACWI, which holds a more neutral weighting to value stocks, more closely aligns with the risk and return expectations of Betterment’s diverse range of client types across individuals, financial advisors, and 401(k) plan sponsors. Additionally, as markets have grown more efficient and value factor investing more popularized, potentially compressing the value premium, we have a marginally less favorable view of the forward-looking, risk-adjusted return profile of the exposure. That being said, we have not entirely lost conviction in the research supporting the prudence of value investing. The value factor’s deep academic roots drove decisions to incorporate the value tilt into Betterment’s portfolios from the company’s earliest days. For investors who wish to remain invested in a value strategy, we have added the Value Tilt portfolio strategy, a separate option from the Core portfolio strategy to our investing offering. The Value Tilt portfolio strategy maintains the Core portfolio strategy’s global diversification across stocks and bonds while including a sleeve within the stock allocation of large-, mid-, and small-capitalization U.S. value funds. We calibrated the size of the value fund exposure based on a certain target historical tracking error to the backtested performance of the latest version of the Core portfolio strategy. Based on this approach, investors should expect the Value Tilt portfolio strategy to generally perform similarly to Core, with the potential to under- or outperform based on the return of U.S. value stocks. With the option to select between the Value Tilt portfolio strategy or a Core now without an explicit allocation to value, the investment flexibility of the Betterment platform has improved. VI. Innovative Technology Portfolio Strategy In 2021, Betterment launched the Innovative Technology portfolio strategy to provide access to the thematic trend of technological innovation. The premise of investing in this theme is that your investments incorporate exposure to the companies that are seeking to shape the next industrial revolution. Similar to the Value Tilt portfolio, the Core portfolio strategy is used as the foundation of construction for the Innovative Technology portfolio. With this portfolio strategy, we calibrated the size of the innovative technology fund exposure based on a certain target historical tracking error to the backtested performance of the latest version of the Core portfolio strategy. Through this process, the Innovative Technology portfolio maintains the same globally diversified, low-cost approach that is found in Betterment’s investment philosophy. The portfolio however has increased exposure to risk given that innovation requires a long-term view, and may face uncertainties along the way. It may outperform or underperform depending on the return experience of the innovative technology fund exposure and the thematic landscape. VII. Conclusion After setting the strategic weight of assets in the Betterment Core portfolio strategy, the next step in implementing the portfolio construction process is Betterment’s investment selection, which selects the appropriate ETFs for the respective asset exposure in a generally low-cost, tax-efficient way. In keeping with our philosophy, that process, like the portfolio construction process, is executed in a systematic, rules-based way, taking into account the cost of the fund and the liquidity of the fund. Beyond ticker selection is our established process for allocation management—how we advise downgrading risk over time—and our methodology for automatic asset location, which we call Tax Coordination. Finally, our overlay features of automated rebalancing and tax-loss harvesting are designed to be used to help further maximize individualized, after-tax returns. Together these processes put our principles into action, to help each and every Betterment customer maximize value while invested at Betterment and when they take their money home. VIII. Citations 1 Markowitz, H., "Portfolio Selection".The Journal of Finance, Vol. 7, No. 1. (Mar., 1952), pp. 77-91. 2 Black F. and Litterman R., Asset Allocation Combining Investor Views with Market Equilibrium, Journal of Fixed Income, Vol. 1, No. 2. (Sep., 1991), pp. 7-18. Black F. and Litterman R., Global Portfolio Optimization, Financial Analysts Journal, Vol. 48, No. 5 (Sep. - Oct., 1992), pp. 28-43. 3 Litterman, B. (2004) Modern Investment Management: An Equilibrium Approach. 4 Note that the risk aversion parameter is essentially a free parameter. 5 Ilmnen, A., Expected Returns.