Betterment for Advisors offers a Vanguard CRSP portfolio strategy (“Vanguard CRSP”) to advised clients who wish to invest in a model portfolio composed of Vanguard managed ETFs that seek total return through broad-market global equity and investment grade fixed income exposures. While similar to the Betterment Core Portfolio strategy, Vanguard CRSP differs in several ways.
Both the Betterment Core and Vanguard CRSP portfolio strategies are made up of asset classes to categorize the types of global market exposure included in the portfolio strategy (for example, international equity or U.S. short-term bonds) and both rely on exchange-traded funds (“ETFs”) to represent each asset class. However, the Vanguard CRSP portfolio strategy only selects primary ETFs issued by Vanguard whereas ETFs selected for the Betterment Core Portfolio strategy are issued by a number of different issuers and are selected based on Betterment’s investment selection process, which evaluates ETFs for inclusion based on cost to trade and cost to hold the funds. Because the Vanguard CRSP strategy is limited to Vanguard issued primary funds, it may use less liquid funds than the Betterment Core Portfolio strategy. This means that it may be more difficult to buy and sell certain ETFs in the Vanguard CRSP portfolio without affecting their prices, relative to the ETFs in Betterment’s Core Portfolio.
In addition, the Vanguard CRSP portfolio strategy includes exposure to Real Estate Investment Trusts (“REITs”) in the stock allocation of the portfolio. Betterment’s Core Portfolio includes exposure to REITs through certain of its stock ETFs, but it does not include investments in REIT ETFs. REITs are subject to unique risks. In particular, REIT ETFs are sensitive to increases in interest rates. REIT ETF dividends are also taxed at ordinary income rates, rather than at the preferential rates at which dividends from other ETFs may be taxed. The Vanguard CRSP model portfolio strategy (as proposed by Vanguard) would also include a 2% allocation to a money-market fund, a cash equivalent, which Betterment cannot hold in investing goals. Betterment deviates from the Vanguard CRSP model portfolio allocation for the Vanguard CRSP portfolio strategy by investing the 2% allocation in proportion to the stock and bond ETFs that make up the rest of the portfolio.
There are several features of Betterment’s service that either will not work or will work differently for the Vanguard CRSP portfolio. Betterment will recommend an initial allocation but will not provide a glide path for goals for which the Vanguard CRSP portfolio is elected, and Betterment’s auto-adjust feature is unavailable for the Vanguard CRSP portfolio.
Investors considering the Vanguard CRSP portfolio should also understand how it impacts the operation of Betterment’s tax loss harvesting feature. Betterment typically implements its tax loss harvesting feature by shifting allocations among three ETFs in each sub-asset class. The Vanguard CRSP portfolio strategy is compatible with Betterment’s tax loss harvesting feature, but electing the Vanguard CRSP portfolio for one or more goals in your account while simultaneously electing a different portfolio for other goals in your account may reduce opportunities to harvest losses. See Betterment’s Tax Loss Harvesting disclosures for further detail. The primary, secondary, and tertiary ETFs in the Vanguard CRSP portfolio may track the same index as each other, which also may result in reduced opportunities to harvest tax losses. In addition, the Vanguard CRSP portfolio strategy is compatible with Betterment’s tax coordinated portfolio feature, but all goals in the tax coordinated portfolio must use the Vanguard CRSP portfolio strategy.
Vanguard provides updated allocations monthly for its Vanguard CRSP portfolio strategy to match the indices the funds track, which may result in increased portfolio turnover relative to the Betterment Core Portfolio strategy. Such portfolio turnover may lead to increased trading costs relative to the Betterment Core Portfolio.