You should carefully read this disclosure and consider your personal circumstances before deciding whether to elect Betterment’s Flexible Portfolio Strategy (“Flexible Portfolio”).
A Flexible Portfolio allows you to create a custom portfolio comprised of exchange-traded funds (“ETFs”). Unlike with Betterment's Core Portfolio Strategy, which uses preset weights for each individual asset class based on your selection of an overall allocation between stocks and bonds, a Flexible Portfolio allows you to choose your own individual asset class weights from asset classes that comprise the Betterment Core Portfolio Strategy as well as certain additional asset classes described below.
If you elect to use a Flexible Portfolio, Betterment will provide default individual asset class weights that correspond to the recommended Betterment Core Portfolio Strategy, which you can then adjust. The default asset class weights represent the weights of the Betterment Core Portfolio Strategy at the goal’s recommended risk level and for the associated account type, either taxable or tax-advantaged. For tax-coordinated goals, the Flexible Portfolio default weights will differ from the Core Portfolio in that the aggregate bond asset class will not be replaced by municipal bonds in the taxable account, while municipal bonds remain an option for the user to select themselves.
As with every portfolio strategy that Betterment offers, Betterment has the discretion to choose which specific ETFs to purchase or sell to further your investment objectives, as well as when to place trades for those ETFs. The particular ETFs used in a Flexible Portfolio are subject to change based on Betterment’s evaluation of the cost of ownership of ETFs representing exposure to each asset class, among other factors. Read more about Betterment’s ETF selection process.
The Betterment Core Portfolio Strategy is designed at each risk tolerance level (ranging from 0% stocks to 100% stocks) to deliver diversified portfolios that seek to maximize risk-adjusted returns. If you decide to build a Flexible Portfolio instead, you should be aware that selecting individual asset class weights results in trade offs along several dimensions, including expected return, risk, diversification, and tax-efficiency. Although Betterment will provide feedback on the overall risk and diversification of your individual asset class weights, the allocation you choose is your own responsibility, and the performance of your Flexible Portfolio may be better or worse than the performance of your recommended Betterment Core Portfolio Strategy.
There are several ways that a Flexible Portfolio differs from the Betterment Core Portfolio Strategy. You should consider these differences when deciding if you wish to elect a Flexible Portfolio.
The Flexible Portfolio allows you to choose from additional asset classes relative to the Betterment Core Portfolio Strategy, providing exposure to commodities, Real Estate Investment Trusts (“REITs”), and U.S. high yield bonds. Within each asset class, Betterment has discretion to select ETFs that correspond to the particular asset class category, and may modify such ETFs when it deems appropriate. Each of these additional asset classes are subject to unique risks. In particular:
(1) Commodities typically have higher fund fees than the investments in the Betterment Core Portfolio Strategy and are sensitive to changes in commodities futures markets which can be influenced by world events, import controls, supply and demand of physical goods, and government regulation, among other factors.
(2) REITs are sensitive to interest rate movements and are also taxed at ordinary income rates, rather than at the preferential rates at which dividends from other ETFs may be taxed.
(3) U.S. high yield corporate bonds invest in bonds that are more likely to default and are more volatile, and thus riskier than the U.S. bonds held in the Betterment Core Portfolio Strategy.
Depending on the individual asset classes and on the weights you select, you may incur aggregate fund costs that are greater or less than those in the Betterment Core Portfolio Strategy for a comparable level of risk and expected return.
Unlike with the Betterment Core Portfolio, Betterment Innovative Technology Portfolio, Betterment’s SRI Portfolios, or the Goldman Sachs Smart Beta Portfolio, automatic allocation adjustments (“auto-adjust”) cannot be set up for a Flexible Portfolio. To the extent that you would like for a goal with a Flexible Portfolio to become more conservative as you approach the end of its term, you will need to adjust the allocation yourself. Adjusting the allocation over time yourself may be less tax efficient than allowing Betterment to automatically adjust your allocation.
Investing portfolios require a portfolio minimum balance in order for a rebalancing transaction to occur (which can be the aggregate of balances in a tax-coordinated portfolio); see Betterment’s portfolio minimum disclosures for further details. If your investing portfolio balance exceeds the required minimum, Betterment will perform automated rebalancing to correct drifts in allocations, aligning back to the target weights that you have customized in your portfolio.
Investors considering a Flexible Portfolio should consider how it impacts the operation of Betterment’s Tax Loss Harvesting+™ and Tax Coordination™ features. Depending on the individual asset class weights you select, there may be more or fewer opportunities for tax loss harvesting in your Flexible Portfolio relative to tax loss harvesting opportunities in the Betterment Core Portfolio Strategy with a comparable level of risk or expected return. Eliminating exposure entirely to individual asset classes in a Flexible Portfolio will generally also reduce opportunities for tax loss harvesting. You can use Tax Coordination with a Flexible Portfolio. If you elect a Flexible Portfolio for your Retirement Goal, all Betterment investment accounts within your Retirement Goal will share the same Flexible Portfolio, with individual asset classes distributed using our asset location strategies. However, altering or removing asset classes may impact the effectiveness of Tax Coordination relative to its effectiveness when used with the Betterment Core Portfolio Strategy.