What are the different rebalancing methods Betterment uses?

Once your account balance is at or past the minimum threshold, Betterment can automatically rebalance your portfolio when it drifts beyond your target allocation threshold using several different methods. Please note, the below information only pertains to non-crypto, stock and bond investment portfolios at Betterment. For more information on how rebalancing works with Betterment’s crypto portfolios, please visit this FAQ.

Cash Flow Rebalancing

This method involves either buying or selling—but not both at the same time—and is useful when cash flows into or out of the portfolio are happening anyway. Every cash flow (e.g. deposit, dividend reinvestment, or withdrawal) is used to rebalance your portfolio. Fractional shares allow us to allocate these cash flows with a level of precision.

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 underweight in, reducing your drift. The result is that the need to sell in order to rebalance is reduced, which in turn reduces capital gains and tax implications. With sufficient inflows, the need to sell is eliminated.

Details about your goal’s rebalancing status is available in the Portfolio tab of your non-crypto investing goals. Whenever your drift reaches 2% or higher, we calculate the deposit required to reduce your drift, and make it easy for you to make the deposit.

Outflows: Outflows (e.g. withdrawals) are likewise used to rebalance, by first selling asset classes which are overweight. Once we have sold all asset classes that you are overweight in, we strive to sell all asset classes equally to keep you balanced. We employ a sophisticated lot selection algorithm called TaxMin within asset classes to minimize the tax impact as much as possible in taxable accounts.

Sell/Buy Rebalancing

In the absence of cash flows, or when they are not sufficient to keep your portfolio’s drift within a certain tolerance, we rebalance by selling and buying. We evaluate your holdings through the lens of six super asset classes: US Bonds, International Bonds, Emerging Markets Bonds, US Stocks, International Stocks, and Emerging Markets Stocks. We strive to sell just enough of the overweight super asset classes and use the proceeds to buy into the underweight super asset classes to reshuffle the assets in the ETF portfolio and reduce the drift.

Sell/Buy rebalancing is automatically triggered whenever the portfolio drift reaches 3%. Our algorithms check your drift approximately once per market day, and rebalance if necessary.

It’s possible for your drift to stay above 3% if you have no long-term lots to sell (usually due to the account being less than a year old) and there is an absence of cash flows.

That’s because as with any sell trade, our TaxMin algorithm seeks to select the lowest tax impact lots, and stops before selling any lots that would realize short-term capital gains when possible. Since short-term capital gains are taxed at a higher rate than long-term capital gains, we can achieve higher after-tax outcomes by simply waiting for those lots to become long-term before rebalancing, if it's still necessary at that point.

If you’d like to turn off automated sell/buy rebalancing so that we only rebalance your portfolio in response to cash flows (e.g. deposits, withdrawals, or dividend reinvestments) and not by reshuffling assets already in the portfolio, please contact us.

Allocation Change Rebalancing

Manually adjusting the target allocation will also trigger a rebalance. 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, and you will see a Tax Impact Preview before finalizing the change.