One of the fundamentals of good investing is good diversification. But it’s hard to do well. Here at Betterment we have done that work for you—every customer can easily invest in a globally diversified portfolio of up to 12 ETFs.
We picked those 12 based on careful consideration. For the bond basket, we needed to balance domestic and international interest rate risk and credit risk; and for our stock basket, we needed an appropriate mix of sectors, countries, and capitalization factors.
The result is that our customers can access a portfolio that is invested in 102 countries and in more than 5,000 publicly traded companies across the world—along with exposure to government debt, corporate bonds, securitized debt, and supranational bonds with a range of creditors and interest rate sensitivities.¹
Explore our diversification
In the diagram below, you can explore the relative weights of each of our portfolio components (on the left) with their geographic distribution (on the right) for any selected level of risk. The connections between the two sides represent the weight of a particular combination.
Portfolio Diversification by Country
Select a different stock allocation by dragging the slider, and roll over each component for details.
Why go global?
As we mentioned above, it’s hard to diversify well. One problem for do-it-yourself investors is that they tend to home-bias their portfolios. They prefer to invest in companies they are comfortable with—because they know them, or they are close to home. Unfortunately, that means they are less diversified than they should be, and expected performance may suffer.
Betterment’s portfolio avoids this home bias by reflecting global stock market weights. U.S. stock markets make up about 48% of the world’s investable stock market–the remainder is international developed (43%) and emerging markets (9%). You can see this on the fact sheet for the MSCI All-Country World Index.
By using the world’s markets as its baseline, the Betterment portfolio diversifies risk on a number of levels including currency, interest rates, credit risk, monetary policy, and economic growth country by country. Even as economic circumstances may drag down one nation, global diversification decreases the risk that one geographic area alone will drag down your portfolio.
To diversify risk
When we selected our bond basket components, we considered which factors affect bond returns—interest rates risk and credit risk. Then we selected funds that would diversify those risks.
For example, with high-quality domestic U.S. bonds, the risk comes from a potential rise in interest rates, which will cause a fall in value for longer-dated bonds. To diversify away from this specific U.S. interest rate risk, we picked another bond asset with low correlation—in this case, high-quality international bonds. The particular fund we used, BNDX, hedges out all currency risk; and includes bonds from stable international governments and international issuers, each of which have their own interest rate risk and credit risk.
We also invested a smaller proportion in dollar-denominated emerging market bonds. These tend to have much higher coupons (4.9% at time of publication), but also more volatility in price, as they have a higher exposure to credit risk from international issuers.
To capture growth
Among our various stock basket components, we include international stocks in order to benefit from growth overseas in developed markets, including the U.K., Japan, Germany, France, Australia, and Switzerland. This helps our portfolio maintain similar expected returns as more concentrated domestic portfolios, but with lower risk.
Then with the emerging markets stock component (VWO), we can capture growth in small but expanding markets such as Brazil, India, and China. This further diversifies our portfolio, and should boost expected returns, particularly at higher risk allocations.
About the data
All countries with less than 1% of a given asset class have been grouped into the “all others” category. The international data for this diagram is based on the Vanguard profiles for VWOB, BNDX, VEA, and VWO on March 12, 2014. Note that the relative weight of certain countries will likely change slightly over time. You can see every fund in our portfolio here.
The interactive chart was produced by Joe Jansen.
¹ The portfolio invests in 102 countries at all but 100% bonds and 100% stocks.