Global diversification, maximum efficiency
Building on decades of Nobel-prize winning research, we aim to achieve the best investor returns possible.
Our portfolio is maximally diversified, and comprises low-cost, liquid, index-tracking, exchange-traded funds, or ETFs. We use tax-efficient algorithms and automate optimal behavior to maximize your ability to grow your money.
An optimal allocation tailored for you
When you deposit money with Betterment, every dollar is seamlessly invested in up to 12 different asset classes, optimized for your selected asset allocation.
Stock and bond ETFs are optimally weighted to provide a progressively increasing amount of risk and potential return. Lower risk portfolios have more short-term government-backed bonds and less volatile stocks. Short-term government bonds exit the portfolio above 42% stocks. As you move up the allocation spectrum, we introduce bonds and stocks with higher risk but higher potential returns.
We distinguish between taxable and retirement accounts when allocating bonds for additional optimization. Taxable accounts hold federally tax-exempt municipal bonds, providing portfolios favorable after-tax return. Retirement accounts maintain exposure to U.S. investment-grade bonds.
How we picked the funds
Each ETF has been selected to balance considerations of low cost and high liquidity as a means to access each asset class. When making the selection for each ETF, we considered the following: expense ratio, bid-ask spread, assets under management, number of holdings, exchange rate hedging, and capital gains implications. Read more about our Investment Selection Methodology.
Our portfolio includes stock ETFs that efficiently capture the broad U.S. stock market, and international developed and emerging markets. Your money is invested in literally thousands of companies instantly. Exactly how much of your portfolio is made up of which stocks depends on the exact allocation you choose. Our stock ETFs include:
US Total Stock MarketUS Total Stock Market contains broad exposure to the entire US stock market, including growth and value companies of small, mid and large capitalizations. This asset class allows participation in the historically strong long-term growth of the US economy.
Vanguard U.S. Total Stock Market Index ETF (VTI)
US Large-Cap Value StocksUS Large-Cap Value stocks overlap with the US Total Stock Market, but are included to tilt the portfolio toward large-size companies with low price-to-earnings ratios. Value-tilting has historically resulted in outperformance, and also increases the portfolio's dividend yield.
Vanguard US Large-Cap Value Index ETF (VTV)
US Mid-Cap Value StocksUS Mid-Cap Value stocks overlap with the US Total Stock Market, but are included to tilt the portfolio towards companies medium size companies with low price-to-earnings ratios. Value-tilting has historically resulted in outperformance, and also increases the portfolio's dividend yield.
Vanguard US Mid-Cap Value Index ETF (VOE)
US Small-Cap Value StocksUS Small-Cap Value stocks overlap with the US Total Stock Market, but are included to tilt the portfolio towards companies small size companies with low price-to-earnings ratios. Value-tilting has historically resulted in outperformance, and also increases the portfolio's dividend yield.
Vanguard US Small-Cap Value Index ETF (VBR)
International Developed StocksDeveloped Markets stocks provide exposure to a diverse set of companies from international developed economies including the UK, Europe, Japan, and others. It has a similar risk/return profile as broad US stocks but with lower internal correlations as compared to the US market.
Vanguard FTSE Developed Market Index ETF (VEA)
Emerging Market StocksEmerging Markets provide higher return potential and diversification, however it comes with higher risk compared to US or International Developed stocks. This asset helps your portfolio to grow with developing nations as they modernize and become wealthier.
Vanguard FTSE Emerging Index ETF (VWO)
Why these stock ETFs?
Our U.S. exposure covers the total U.S. market with a slight tilt towards value and small-cap stocks. The value and small-cap tilt has tended to beat the market in the long term, based on research by Nobel-prize winner Eugene Fama and Kenneth French.
By adding international stocks, we benefit from growth overseas in developed markets, including the U.K., Japan, and Europe, and achieve the same expected return with lower risk. With the emerging market stock ETF, we can capture growth in small but expanding markets such as Brazil, India, and China. This further diversifies our portfolio, and means we can reach higher expected return levels, especially at higher risk allocations.
Our portfolio includes bond ETFs that allow us to precisely manage the level of risk at every allocation, and improve the risk-adjusted performance of the portfolio at higher risk levels. The exact amounts of each bond ETF will depend on the allocation you choose. Our bond ETFs include:
Short-Term TreasuriesShort-Term Treasuries have maturities between one month and one year. This extremely low-risk asset class is a cash alternative that generates nominal benefit through interest payments, and de-risks the portfolio at safer allocations.
iShares Short-Term Treasury Bond Index ETF (SHV)
Inflation Protected BondsInflation Protected Bonds are issued by the US Treasury with the value of the principal (but not interest payments) indexed to inflation. This allocation serves to insulate a part of the portfolio from the depreciating effects of inflation while also having historically low correlation with other asset classes.
Vanguard Short-term Inflation-Protected Treasury Bond Index ETF (VTIP)
US High Quality Bonds (IRA and 401(k) accounts)US High Quality Bonds provide exposure to the US investment-grade bond market, bringing stability to the portfolio with higher income levels than US Treasuries. While the credit risk is very low, the average bond maturity of 7 years means there is some interest rate risk.
Vanguard US Total Bond Market Index ETF (BND)
National Municipal Bonds (Taxable accounts)Municipal Bonds are federally tax-exempt bonds issued by state and regional governments to finance capital expenditures. While municipal bond credit risk is slightly higher than US Treasuries, it is still quite low and coupled with favorable after-tax income makes them an excellent addition to taxable portfolios.
iShares National AMT-Free Muni Bond Index ETF (MUB)
US Corporate BondsUS Corporate Bonds are issued by corporations to finance business activities. Corporate bonds generally offer much more attractive yields and opportunity for capital appreciation to compensate investors for default risk. They also diversify the fixed-income portfolio, resulting in higher risk-adjusted returns.
iShares Corporate Bond Index ETF (LQD)
International Developed BondsInternational Bonds are issued by non-US developed market governments and organizations. They have high credit quality and provide interest rate diversification for a bond portfolio, resulting in higher risk-adjusted returns.
Vanguard Total International Bond Index ETF (BNDX)
Emerging Market BondsEmerging Markets Bonds are dollar-denominated bonds issued by governments with economies that are rapidly growing and industrializing. This asset class is higher risk but also offers a higher expected return than developed markets' bonds or US Treasuries. Their unusually low correlation with other bonds result in higher risk-adjusted performance for the portfolio.
Vanguard Emerging Markets Government Bond Index ETF (VWOB)
Why these bond ETFs?
These bonds ETFs allow us to choose a precise level of risk, and then get the best possible return at that level of risk by balancing four different growth factors: U.S. interest rate risk, U.S. company credit risk, international interest rate risk, and international credit risk. When applicable, we also consider the after-tax benefits of allocating to federally tax-exempt municipal bonds.
Taking on a higher exposure to any of these factors means higher expected returns, with higher potential for short-term losses. However, by blending them together intelligently, we can maintain the return level and reduce the severity of losses.
Betterment would have outperformed the average advised investor in almost all periods over the last decade.
Optimal Asset Allocation
Asset allocation is the art of combining assets to achieve the highest expected return for a given level of risk. With more diversified assets at every risk level, we are able to build a portfolio that has higher expected returns regardless of how much risk you want to take on.
When crafting our portfolio, we used two techniques usually only available to high net worth individuals: the Black-Litterman expected returns model, and optimization for downside risk measures.
First, we employed the Black-Litterman model to generate forward-looking expected returns. To do this, we analyzed the global portfolio of investable assets and their proportions. The Black-Litterman model, a complex mathematical equation, allows us to use this global portfolio to generate forward-looking expected returns – for each asset class.
While many firms also use Black-Litterman to make short-term market-timing decisions by imposing their own views, we adhere to our core index-based investment philosophy and do not. We get the best possible estimates of expected returns – those aggregated from millions of investors across the globe.
Optimization for Downside Risk
Next, we optimized the portfolio for each level of expected return, mixing assets to minimize the risk taken. We considered the potential downside (drawdowns) as well as the uncertainty (or expected volatility) as risk measures, and traded them off against expected return. The result allowed us to flexibly set asset allocation at every given level of risk.
This analysis results in a portfolio that is invested in over 100 countries and in more than 5,000 publicly traded companies across the world. This includes exposure to government debt, corporate bonds, securitized debt, and supranational bonds with a range of creditors and interest rate sensitivities. The map below shows the geographic diversification for each possible portfolio allocation from 0-100% stocks. Drag the slider to see how the diversification shifts with your risk tolerance.
You can read more about how geographic diversification informs our investment selection in this post.
A portfolio that spans over 100 countries
Instructions: Drag the slider to change the portfolio allocation, zoom and pan with your mouse, and hover for details.