Betterment offers an Innovative Technology (“Innovation portfolio”) portfolio strategy for investors that want targeted exposure to high-growth companies with some risk within a broad-market portfolio. The Innovation portfolio is built off of the the ETFs that make up Betterment’s Core portfolio but removes the Core portfolio tilt toward value and substitutes exposure with an innovation ETF, the SPDR® S&P Kensho New Economies Composite ETF (“Innovation ETF”). The Innovation ETF invests in high-growth potential U.S. and global companies in various industries using existing and emerging technologies, including clean energy, semiconductors, robotics, automation, and blockchain. The remainder of the Innovation portfolio is comprised of the ETFs that make up Betterment’s Core portfolio. See the Core portfolio methodology for more details.
The Innovation ETF seeks to track the performance of a benchmark index, the S&P Kensho New Economies Composite Index, which selects companies for inclusion in the index based on screening company regulatory forms for key words and phrases in the appropriate context relevant to new economy sectors (e.g., screening for the key word “blockchain”). The Innovation ETF bears increased risk relative to other ETFs in the portfolio based on its equity holdings within industries whose valuation may be subject to optimistic expectations in the evolution of technology and future growth. In the event those expectations do not materialize, the prices of assets held in the ETF can decline.
The Innovation ETF is less diversified than the comparable ETFs it replaces in Betterment’s Core portfolio because the Innovation ETF concentrates investments in certain industries or groups of industries, or excludes certain securities that do not satisfy the high-growth potential criteria for inclusion. This increases the risk of loss due to adverse economic, business, or other developments that affect those industries or companies. Reduced diversification also can increase the volatility of the Innovation portfolio relative to Betterment’s Core portfolio.
The Innovation ETF is also less liquid than other broad market ETFs, meaning it can be more difficult to buy and sell the Innovation ETF without affecting its price, relative to other ETFs in the Innovation or Core portfolios. As a result, there can be increased trading costs to enter or exit positions in the Innovation portfolio. This also may result in wider discrepancies between the market prices of the Innovation ETF and the prices of its underlying basket of securities than for comparable ETFs it replaces in Betterment’s Core portfolio, particularly during times of market stress.
Betterment’s Innovation portfolio does not include any exposure to the Innovation ETF when the portfolio is allocated entirely to bonds (i.e. a 100% bond allocation), so an investor whose Innovation portfolio is allocated entirely to bonds will not have any exposure to the Innovation ETF. Generally as your portfolio allocation shifts to higher bond allocations, the percentage of your portfolio attributable to the Innovation ETF decreases. Your portfolio incorporates non-innovation bond ETFs because innovation bond alternatives do not exist or lack sufficient liquidity.
Investors in the Innovation portfolio will incur additional fund costs compared to investors in the Core portfolio because the Innovation ETF in the Innovation portfolio has a higher aggregate expense ratio than the value tilt and other funds used in the Core portfolio. The specific fees for each fund in the Innovation portfolio are listed in the funds’ prospectuses, which are available through the Holdings tab in your account.
Investors considering Betterment’s Innovation portfolio should understand how it impacts the operation of Betterment’s Tax Loss Harvesting+ (“TLH”) feature. The Innovation ETF is not eligible for TLH due to lack of suitable secondary and tertiary tickers in this asset class that meet Betterment’s investment criteria. Additionally, electing the Innovation portfolio for one or more goals in your account while simultaneously electing a different portfolio for other goals in your account may reduce opportunities for TLH to harvest losses. See Betterment’s TLH disclosure for further detail.
The Innovation portfolio is compatible with Betterment’s other automated portfolio features, such as dividend reinvestment, rebalancing, auto-adjust, and tax coordination. With respect to rebalancing, 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 Innovation portfolio balance exceeds the required minimum, Betterment will perform automatic rebalancing to correct drifts in allocations, aligning back to the target weights.