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Socially Responsible Investing Portfolio Strategy Disclosure

Betterment’s socially responsible investing (“SRI”) portfolios are constructed considering environmental, social, and corporate governance (“ESG”) criteria when selecting investments, in addition to financial criteria. Betterment offers a SRI Broad Impact portfolio that considers all three ESG pillars, as well as two additional more focused SRI portfolio options, a Climate Impact portfolio and Social Impact portfolio (collectively the three SRI portfolios, “SRI portfolios”). The following disclosures address items generally applicable to all SRI portfolios, including legacy versions of the SRI portfolios, and then discuss the features and risks particular to each of the Broad Impact portfolio, Climate Impact portfolio, and Social Impact portfolio. For additional detail on the construction of Betterment’s SRI portfolios, see our white paper.

A. General Construction of SRI Portfolios

Betterment does not directly select companies to include in, or exclude from, the SRI portfolios. Rather, Betterment takes both a scoring-based approach and an engagement-based approach (as described below) to select socially responsible ETFs to comprise a portion of the SRI portfolios.

Socially responsible ETFs include ETFs comprised of companies that score highly on social responsibility factors and minimize exposure to companies that score poorly on those factors (“scoring-based socially responsible ETFs”) and ETFs that express a social responsibility preference through the fund manager’s engagement with the companies held through the fund, via shareholder proposals and proxy voting (“engagement-based socially responsible ETFs”).

i. Scoring-based socially responsible ETFs

The scoring-based socially responsible ETFs included in the SRI portfolios track benchmarks of companies that meet certain ESG standards measured by securities research firms employed by the ETF sponsors. Betterment considers ESG factor scores from MSCI, an industry-leading provider of financial data and ESG analytics that has served the financial industry for more than 40 years. See the ESG Ratings Methodology Executive Summary and ESG Ratings descriptions for more details. The methodologies used to create the socially responsible benchmarks tracked by scoring-based socially responsible ETFs may differ, and may change over time. For example, some benchmarks may exclude entire companies in certain industries (e.g., tobacco, military weapons, civilian firearms, genetically modified organisms, nuclear power, alcohol, or adult entertainment) while others may exclude companies that have been the subject of recent environmental, social, or governance controversies.

Additionally, the criteria used to assess the social responsibility practices of the companies in benchmarks tracked by the scoring-based socially responsible ETFs may change over time, and may differ from criteria used by other ETF sponsors to evaluate companies’ social responsibility practices. As a result, the same company could score highly under one organization’s social responsibility criteria but poorly under another organization’s criteria. scoring-based socially responsible ETFs, and consequently the SRI portfolios, reduce, but do not fully eliminate, exposure to companies that investors interested in socially responsible investing may consider to be undesirable.

The selection criteria of the benchmarks typically tracked by the scoring-based socially responsible ETFs focus on multiple metrics and could include companies that score highly on certain but not all of those dimensions. For example, an energy exploration company that scores well on its social and governance practices might be included in a scoring-based socially responsible ETF even if it scores poorly on its environmental practices. Additional detail regarding the selection of the companies included in or excluded from the scoring-based socially responsible ETFs in which the SRI portfolios invest can be found in the prospectuses drafted by the managers of those ETFs. Links to those prospectuses are available in the Holdings tab of your account.

ii. Engagement-based socially responsible ETFs

The engagement-based socially responsible ETFs track an index, which we use to determine which asset classes the ETF gives exposure to, and does not screen underlying holdings. Rather engagement-based socially responsible ETFs express an SRI preference through the fund manager’s active engagement with companies held through the fund, via shareholder proposals and proxy voting. This engagement-based SRI strategy may change over time, as certain shareholder engagement tools may prove more successful than others. The success of any particular proposal or proxy vote is not guaranteed, and if the fund manager’s engagement strategy proves unsuccessful, underlying companies may not adopt more socially responsible behaviors. Betterment reviews engagement-based socially responsible ETFs to ensure that the campaigns are consistent with Betterment’s ESG mandate. Additional detail regarding the types of shareholder proposals and campaigns being run by the fund managers, and which companies are targeted, can be found in the prospectuses drafted by the fund managers of the engagement-based socially responsible ETFs. Links to those prospectuses are available in the Holdings tab of your account.

iii. Generally applicable risks

There are several risks that are different from the risks associated with investing in Betterment’s standard portfolio (the “Core portfolio”) that investors should consider when deciding whether they wish to elect one of Betterment’s SRI portfolios.

The socially responsible ETFs in Betterment’s SRI portfolios are less diversified than comparable broad market ETFs because scoring-based socially responsible ETFs exclude certain companies and industries. In addition, the relative weightings of companies and sectors in the socially responsible ETFs may differ from the relative weighting of companies and sectors in comparable broad market ETFs. This means that Betterment’s SRI portfolios may be more or less volatile than the Core portfolio, or other broad market indices. Lastly, the scoring–based socially responsible ETFs tend to tilt away from small capitalization stocks when compared with the broader market, as small capitalization stocks often score poorly from an ESG perspective. The Betterment Core portfolio also includes a dedicated tilt towards small capitalization stocks that is not present in the SRI portfolios. As a result, the SRI portfolios may have more limited investments in small capitalization stocks as compared to the Betterment Core portfolio.

The socially responsible ETFs in Betterment’s SRI portfolios are typically less liquid than ETFs that track comparable asset classes. This means that it is generally more difficult to buy and sell a socially responsible ETF without affecting its price, relative to a comparable broad market ETF. As a result, there may be increased trading costs to enter or exit positions in the socially responsible ETFs in which the SRI portfolios invest relative to comparable broad market ETFs. This also may result in wider discrepancies between the market price of the ETF and the price of its underlying basket of stocks than for comparable broad market ETFs, particularly during times of market stress.

Betterment’s SRI portfolios do not include socially responsible ETFs for any of the SRI portfolios when the relevant portfolio is allocated entirely to bonds (i.e. a 100% bond allocation), so an investor whose Broad Impact, Climate Impact or Social Impact portfolio is allocated entirely to bonds will not have any exposure to socially responsible ETFs. Generally as your portfolio allocation shifts to higher bond allocations, the percentage of your portfolio attributable to socially responsible ETFs decreases. Non-socially responsible bonds are incorporated into the portfolio because the corresponding socially responsible alternatives do not exist or may lack sufficient liquidity. These non-SRI bond funds provide geographic and asset class diversification and meet our requirements for lower cost and high liquidity options. Additionally, engagement-based socially responsible ETFs may track an index that does not take into account a company’s ESG factors when weighting different companies. Rather than invest more or less in ESG-scored companies, engagement-based socially responsible ETFs use shareholder engagement tools to focus on improving companies’ social and environmental impact, regardless of whether the underlying company is considered ESG or not.

Investors in Betterment’s SRI portfolios will incur additional fund costs compared to investors in Betterment’s Core portfolio because the socially responsible ETFs in Betterment’s SRI portfolios generally have higher expense ratios than the expense ratios for comparable broad market ETFs in Betterment’s Core portfolio. The specific fees for each ETF in the SRI portfolios are listed in the ETF’s prospectus, which is available through the Holdings tab in your account. Because these increased fees are typically associated with a stock allocation in Betterment’s SRI portfolios, a higher stock allocation in an SRI portfolio generally will result in higher fund costs relative to an investor with the same stock allocation invested in Betterment’s Core portfolio.

Because social responsibility criteria exclude securities of certain issuers for non-financial reasons, investors may forego some market opportunities available to those who do not use these criteria.

Investors who invested in Betterment’s SRI portfolio prior to October 2020 (the “legacy SRI portfolio”) and did not switch to one of the current SRI portfolios should be aware of certain differences between the legacy SRI portfolio and the current SRI portfolios. The legacy SRI portfolio may have different portfolio weights, meaning as we introduce new asset classes and adjust the percentage any one particular asset class contributes to a current SRI portfolio, the percentage an asset class contributes to the legacy SRI portfolio will deviate from the makeup of the current SRI portfolios and Betterment Core portfolio. The legacy SRI portfolio may also have different funds, ETFs, as compared to both the current versions of the SRI portfolios and the Betterment Core portfolio. Lastly, the legacy SRI portfolio may also have higher exposure to broad market ETFs that do not currently use social responsibility screens or engagement-based tools and retain exposure to companies and industries based on previous socially responsible benchmark measures that have since been changed. Betterment may add additional socially responsible ETFs to the current SRI portfolios as more become available and may otherwise change the composition of the SRI portfolios in a variety of ways, including but not limited to, altering the socially responsible ETFs in which the SRI portfolios invest or the allocation to such ETFs or removing other ETFs from the SRI portfolios as socially responsible ETF replacements become available. These future updates will not be reflected in the legacy SRI portfolio.

B. Broad Impact Portfolio

Betterment offers a broad impact (“Broad Impact”) portfolio for investors that want to focus on all ESG dimensions of social responsibility. The Broad Impact portfolio invests assets in socially responsible ETFs. Socially responsible ETFs provide exposure to, among other asset classes, U.S. and international SRI companies, and in certain cases, U.S. SRI bonds, as well as an allocation for an engagement-based SRI ETF. Betterment’s Broad Impact portfolio does include socially responsible bond ETFs for tax-deferred retirement accounts but not for taxable accounts. If applicable, the remainder of the Broad Impact portfolio may consist of broad market ETFs that do not currently use social responsibility screens (the “other ETFs”).

Investors considering investing in the Betterment Broad Impact portfolio should be aware of the differences from the Core portfolio and the Broad Impact portfolio’s unique risks, as described below. Betterment’s Broad Impact portfolio differs from the Betterment Core portfolio by substituting exposure to the entire market of U.S. large capitalization stocks with exposure to the stocks of a subset of U.S. large capitalization companies that meet certain standards with respect to their ESG factors. Betterment’s Broad Impact portfolio also substitutes exposure to the entire market of emerging market stocks and developed market stocks with exposure to a subset of those stocks screened using ESG factors. The Broad Impact portfolio removes the Core portfolio tilt toward value and small capitalization in favor of increased exposure to U.S. SRI companies, which tend to tilt away from small-cap stocks when compared with the broader market, as small-cap stocks often score poorly from an ESG perspective. Lastly, the Broad Impact portfolio includes an engagement-based socially responsible ETF that provides U.S. large capitalization exposure. As discussed in our white paper, based on historical and forward looking analyses comparing the Broad Impact portfolio to the Core portfolio and adjusting for stock allocation level, the data showed no significant difference in performance of the Broad Impact portfolio versus the Core portfolio.

Other ETFs provide exposure to asset classes for which socially responsible ETFs satisfying Betterment’s investment selection criteria are currently unavailable, engagement-based socially responsible ETFs provide exposure to companies not screened for ESG criteria, and scoring-based socially responsible ETFs may include companies that do not score highly on certain ESG categories. Betterment’s Broad Impact portfolio therefore reduces, but does not fully eliminate, exposure to companies that investors interested in socially responsible investing may consider to be undesirable. Betterment may add additional socially responsible ETFs to the Broad Impact portfolio as more become available and may otherwise change the composition of the SRI portfolio in a variety of ways, including but not limited to, altering the socially responsible ETFs in which the Broad Impact portfolio invests or the allocation to such ETFs.

Investors considering Betterment’s Broad Impact portfolio should understand how it impacts the operation of Betterment’s Tax Loss Harvesting+ (“TLH”) feature. Betterment does use scoring-based socially responsible ETFs for the secondary and tertiary tickers in the U.S. SRI companies asset class, but does not use scoring-based socially responsible ETFs for the secondary and tertiary tickers in the developed and emerging market stock asset classes because of a lack of suitable alternatives that meet Betterment’s investment criteria. If you elect the Broad Impact portfolio, enable TLH, and Betterment harvests losses in the developed and emerging market asset classes, it may reduce the portion of your portfolio held in scoring-based socially responsible ETFs. The engagement-based socially responsible ETF is not eligible for TLH due to lack of suitable secondary and tertiary tickers in this asset class that meets Betterment’s investment criteria. Additionally, electing the Broad Impact 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 disclosures for further detail.

C. Climate Impact Portfolio

Betterment offers a climate impact (“Climate Impact”) portfolio for investors who want to invest in an SRI strategy more focused on being climate-conscious rather than focusing on all ESG dimensions equally. Betterment’s Climate Impact portfolio invests assets in a global green stock ETF asset class, certain fossil fuel reserve free ETFs that divest from companies with fossil fuel reserves internationally and in the U.S., and a global green bond ETF asset class (collectively, “climate conscious ETFs”). The Climate Impact portfolio also includes an allocation for an engagement-based socially responsible ETF. For more information about the portfolio construction of the Climate Impact portfolio, please see our white paper.

Investors considering investing in the Climate Impact portfolio should be aware of the differences from the Broad Impact portfolio and the Climate Impact portfolio’s unique risks, as described below. The relative weights of ETFs in the Climate Impact portfolio for a given allocation of stocks and bonds differ from that of Betterment’s Broad Impact portfolio and Core portfolio. Currently, the global green stock ETF asset class and global green bond ETF asset class are not eligible for TLH due to lack of suitable secondary and tertiary tickers in these asset classes that meet Betterment’s investment criteria. With respect to TLH in the Climate Impact portfolio, (1) fossil fuel reserve free ETFs are the only climate conscious ETFs in the Climate Impact portfolio that are eligible for TLH, (2) the ETFs used as the secondary tickers for fossil fuel reserve free ETFs are broad socially responsible ETFs that lack a particular focus on climate consciousness, and (3) the ETFs used as the tertiary tickers for fossil fuel reserve free ETFs are either broad socially responsible ETFs or other ETFs. The engagement-based socially responsible ETF is not eligible for TLH due to lack of suitable secondary and tertiary tickers in this asset class that meets Betterment’s investment criteria. Lastly, because the global green stock and bond asset class ETFs are comprised of global securities, Betterment’s asset location service, tax coordinated portfolios (“TCP”), may be less effective relative to the Betterment Broad Impact portfolio or Betterment Core portfolio. Climate conscious ETFs may be less liquid than the socially responsible ETFs used in Betterment’s Broad Impact portfolio, meaning it may be more difficult to buy and sell climate conscious ETFs in the Climate Impact portfolio without affecting their prices, relative to other socially responsible ETFs.

Investors in the Climate Impact portfolio will incur additional fund costs compared to investors in Betterment’s Broad Impact portfolio and Core portfolio because the climate conscious ETFs in the Climate Impact portfolio have higher aggregate expense ratios than the funds used in Betterment’s Broad Impact portfolio and Core portfolio. The specific fees for each fund in the Climate Impact portfolio are listed in the funds’ prospectuses, which are available through the Holdings tab in your account.

For a description of the additional risks inherent in Betterment’s SRI portfolios, including the Climate Impact portfolio, relative to Betterment’s Core portfolio, please review the risks described in Section A. above.

D. Social Impact Portfolio

Betterment offers a social impact (“Social Impact”) portfolio for investors that want to invest in a strategy more focused on the social pillar of ESG investing (the S in ESG). The Social Impact portfolio gives investors greater exposure to U.S. companies that score highly on the social impact criteria of diversity and inclusion. Betterment’s Social Impact portfolio differs from Betterment’s Broad Impact portfolio by investing a portion of assets in a gender diverse U.S. stock ETF asset class and a minority empowerment U.S. stock ETF asset class (collectively, “social impact ETFs”). The remainder of the Social Impact portfolio is comprised of the socially responsible ETFs and other ETFs that make up Betterment’s Broad Impact portfolio, as described in Section B. above, including an allocation for an engagement-based socially responsible ETF. For more information about the portfolio construction of the Social Impact portfolio, please see our white paper.

Investors considering investing in the Social Impact portfolio should be aware of the differences from the Broad Impact portfolio and the Social Impact portfolio’s unique risks, as described below. The relative weights of ETFs in the Social Impact portfolio for a given allocation of stocks and bonds differ from that of Betterment’s Broad Impact portfolio. Social impact ETFs are not eligible for TLH due to lack of suitable secondary and tertiary tickers in these asset classes that meet Betterment’s investment selection criteria. Similarly, the engagement-based socially responsible ETF is not eligible for TLH due to lack of suitable secondary and tertiary tickers in this asset class that meets Betterment’s investment criteria. The remainder of the socially responsible ETFs and other ETFs present in both the Social Impact portfolio and Broad Impact portfolio have the TLH limitations as described in Section B. above. Social impact ETFs may be less liquid than the socially responsible ETFs used in Betterment’s Broad Impact portfolio, meaning it may be more difficult to buy and sell social impact ETFs in the Social Impact portfolio without affecting their prices, relative to other socially responsible ETFs.

Investors in the Social Impact portfolio will incur additional fund costs compared to investors in Betterment’s Broad Impact portfolio and Core portfolio because the social impact ETFs in the Social Impact portfolio have higher aggregate expense ratios than the funds used in Betterment’s Broad Impact portfolio and Core portfolio. Because only a portion of the Social Impact portfolio is invested in social impact ETFs and the remainder of the portfolio consists of the socially responsible ETFs and other ETFs that comprise the Betterment Broad Impact portfolio, the additional fund costs relative to the Broad Impact portfolio are muted. The specific fees for each fund in the Social Impact portfolio are listed in the funds’ prospectuses, which are available through the Holdings tab in your account.

For a description of the additional risks inherent in Betterment’s SRI portfolios, including the Social Impact portfolio, relative to Betterment’s Core portfolio, please see the risks described in Section A. above.

Last updated: July 15, 2021


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