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Good Financial Cents

Easy ETF Investment Strategies with





By Jeff Rose

I‘ve had several readers email requesting that I talk more about ETF investing. While I have used ETF’s in my clients portfolio and in my own investment portfolio, they still do not represent a large amount of my investment strategy. Nothing wrong with ETF’s; I’ve just been more comfortable with mutual funds.

At the Financial Blogger Conference that I attended, I got a chance to meet with Jon Stein, CEO of  Betterment has been on my radar for a bit, but I never took the chance to research them that much.   After speaking with John and doing my own research, I see Betterment as a good option for those that agree with passive investing and prefer to outsource the investment selection to a third party.

Betterment is an easy ETF investment strategy primed for the “lazy investor” and it’s really simple to get started.

Let’s be clear: You could mimic their strategy with an online broker and potentially save on their annual advisory fee (for accounts less than $25k that’s 0.9% per year.  On a $25k account that would equal $225 per year).    But if you prefer to let them do their research on the investments and also automatically re-balance your portfolios for you, then they would be a great fit for you.

Here’s Jon sharing his most hated money tip at the Financial Conference Blogger conference:


Jon was gracious enough to answer some hard-nosed questions about his company and their investment strategy with ETF’s.

Enter Jon……


1. What was the inspiration behind forming Betterment?

I’m an engineer. I’ve always been passionate about fixing things, making them better.

I spent years working as a consultant for big banks, and found that typical financial products were optimized for corporate profits, not for real people’s goals. Friends would ask me, “What should I do with my money?” Seeing no good answers, and knowing that Wall Street was not looking out for the average individual investor, I felt I had to create a better way.

2.  Why ETFs vs. mutual funds?

Betterment uses ETFs in both our stock and bond portfolios because of the liquidity, low management fees, and tax advantages they provide. An exchange-traded fund (ETF) is a security that tracks an index, a commodity or a basket of assets, like an index mutual fund, but trades like a stock on an exchange. ETFs are bought and sold like stocks throughout the day, which, for investors, means there’s flexibility (called liquidity).  Compared to mutual funds – which have many hidden costs and penalties for early withdrawal – ETFs are relatively transparent and easy on the wallet.

3. What screening process does Betterment use to pick its ETFs? What would constitute a change to the portfolios?

We’ve selected a basket of ETFs designed to represent the broad US and international market. We took a multi-step approach to this selection process. First, we set a target international exposure of 35%, based on global equity allocations and industry best practices.

Second, we defined our target with a slight tilt towards two factors: value and small cap. Value and small cap ETFs are appealing because these two factors have been shown to outperform other stocks over the very long term.

Third, we screened for low fees (excluding any ETFs with fees above 50 basis points) and high liquidity. Liquidity is essential because non-liquid ETFs trade with big spreads, and investors pay the price when buying and selling them.

Finally, we selected the right proportions of the screened funds to match our target.

Betterment Portfolio

We think of Betterment’s portfolio as smarter indexing – not actively managed, but actively monitored indexes. We review our ETF selections at least quarterly, and expect we might update the composition as much as annually. We’re not chasing hot sectors or fads, rather we’re consistently looking for the best representation of the broad market. So a change will typically mean a minor adjustment – swapping one small-cap value fund for another new one that offers lower fees or more liquidity. Before making any changes, we consult our team of advisors, who are top economists, professors and practitioners of finance, and market experts.

4.  What would be defined as the perfect Betterment client?

The beauty of Betterment is that it makes investing accessible to everyone.

You can be a beginner with little knowledge of investing and still earn market returns on a diversified portfolio aimed toward your particular goals, whether they are retirement, education, vacations…anything.

At the same time, many of our customers are experienced, active investors who want to put some money in a smart account where they can enjoy benefits like automatic rebalancing and fractional share trading.

Perhaps the most common customer is a young professional – 33, doctor, lawyer, ex-military, or engineer – savvy about saving and investing, and too smart to waste time with Wall Street brokers or mutual fund warehouses.

All in all, Betterment is a great platform for anyone who wants a simpler, smarter, and more cost efficient way to invest for the long term.

5. What does Betterment feel about the role of the Financial Advisor with consumers vs. using an online company like themselves?

Betterment believes that sound financial advice should be accessible to everyone. And we hold ourselves to a fiduciary standard as investment advisors.

That’s one of the reasons that Betterment is both a registered investment advisor and a broker/dealer – so we can do the investment research and pass on our findings and recommendations to our customers.

Advice can only get an investor so far. You can tell someone to re-balance his portfolio over and over, but he may never “get around to it.” That’s why we also found it important to be a broker/dealer. In this way, we can provide our customers with both actionable advice AND the tools to implement that advice, all in one simple platform.

Monitor Your Portfolio From Your Phone

We actually think Financial Advisors should be using Betterment as a tool for their clients. Betterment is a great way for advisors to help their clients execute their investment plans, stay on track with their goals, and earn market returns all at the same time. Our automatic deposit and re-balancing features also help to automate the good practices advisors promote, so their clients never have to worry about managing these tasks manually.

6.  Why wouldn’t someone go directly through an online broker and avoid the annual advisory fee?
Betterment Advisory Fee Schedule

There are a lot of benefits of using Betterment that distinguish it from a typical online brokerage. One must keep in mind that online brokerages charge costly trading fees, while transactions at Betterment are free. Other benefits Betterment offers include:

straightforward pricing model without hidden fees No minimum balance Focus on the only two investments that matter to 99% of investors – a great stock basket and a conservative bond portfolio. An incredibly easy user experience that makes it easy to understand your money and control your exposure to risk Automatic, seamless diversification (which means higher returns with lower risk) The ability to see how others like you invest Automatic portfolio re-balancing Automatic dividend re-investment Transactions in exact dollar amounts (not whole shares) Goal-based advice and accounting Automatic, regular deposits

All of this means that you can start today in five minutes and never have to worry about your goals again. You can get back to everything else you have to do in life, knowing that you’re earning more and saving more, ‘cause you’re getting the best returns for the lowest cost.

7. Tell us more about your new goals feature.

That is so exciting.  It’s a no-brainer – but of course, it’s never been done before because Wall Street is brain-dead. We all invest for goals. So why not make that explicit, with advice for each?

We launched goal-based investing at FinovateFall this year in New York. Now customers can set up multiple investing goals in their Betterment accounts, and each goal can have its own timeline and asset allocation. The best part is that based on your timeline and goal amount, we will provide you with a recommended asset allocation, and also tell you how much to invest each month to reach your goal. You can even set up automatic deposits to ensure you are always investing the right amount for your goals (and taking advantage of dollar-cost averaging!)

8.  How easy is it to get started?  

Signing up for Betterment takes less than 5 minutes. All you do is link your checking account, choose your asset allocation using a slider, and relax. There is no minimum balance and no paperwork to fill out.

9.  Anything else you want to add?

Thanks for the interview. We’re big fans of Good Financial Cents here at Betterment, and we’re proud to be bringing better investing to people like you and your readers.

Read the Original Article

This article originally published October 17th, 2011 on Good Financial Cents


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