New asset class with municipal bonds added to the Betterment taxable portfolio.
Muni bonds are expected to yield up to 1.0% more than the asset class they replace, after tax.
In our ongoing efforts to create the most tax-efficient portfolio possible for our customers, we have added a new asset class, represented by a tax-exempt national municipal bond fund, the S&P National AMT-Free Muni Bond ETF (MUB), for primary domestic bond exposure. It will replace the US High-Quality bond index fund (AGG) in taxable portfolios.
Dividends paid on this ETF are exempt from federal taxes. We will continue to use AGG, the core bond fund, in IRA accounts, where tax-free dividends do not provide the same advantage.
Improved after-tax returns with municipal bonds
Municipal bonds are expected to increase after-tax returns by more than 1.0% per year, as compared to the asset class they replace. Below, you can see the pre-tax yields of the two asset classes side-by-side. MUB is currently yielding significantly more than AGG even before taxes, but that could change. What won’t change is the advantage built into MUB once you factor in federal taxes. At the highest possible federal rates (single, income of $400k+), nearly half of AGG’s dividend is lost to taxes, while MUB’s yield is unchanged. Even assuming a more common tax bracket (earning roughly $100-200k), the advantage is clear.
|Ticker||Pre-tax yield||After-tax yield (43.4%)||After-tax yield (28%)|
The only drawback for investors is that munis are often thought to carry greater default risk than US Federal government debt. The US has yet to default in modern history, and has the ability to literally print money, which state and local governments do not.
So while municipal defaults are not unheard of, they are actually quite rare as compared to corporate bonds, and relatively benign when they occur. This is because municipal bonds are often either insured privately, or have the backing of the state in the case of a default. It’s also worth noting that when a municipal bond defaults, it tends to mean you get $0.80 back, rather than $1—rather than lose all your principal. Most importantly, MUB comprises more than 2,000 muni bonds across 44 states—diversifying away any default risk for a particular issuer.
Due to these factors, municipal bonds tend to have relatively high credit ratings—comparable in quality and long-term performance to the US High-Quality Bond index.
A look inside the new portfolio
What do you need to do?
Nothing. Existing customers’ portfolios will automatically be transitioned to the new asset class over the coming months. We will replace AGG with MUB and reduce the weight of LQD and BNDX; we will also then increase the weight of MUB in the portfolio in order to maximize its tax-exemption benefit. Customers using our new Tax Loss Harvesting+ service will have MUB as the primary ticker for the asset class, and Barclay’s Municipal Managed Money (TFI) as the alternate.
What’s Inside the Betterment Portfolio Strategy?
Explore the asset classes in Betterment's recommended set of portfolios. Then, take a look at the exchange-traded funds (ETFs) underlying each part of the portfolio strategy.
How to Use Smart Saver for Market Downturns
Market downturns can lead some investors to make hasty decisions with their money. Learn how to use Smart Saver to help manage your downturn decisions more effectively.
Is Betterment Worth It? Estimating the Added Value of a Robo-Advisor
Based on our estimation, using Betterment’s retirement recommendations could earn you 35% more after-tax money in retirement compared to investing on your own.
Explore your first goal
This is a great place to start—an emergency fund for life's unplanned hiccups. A safety net is a conservative portfolio.
Whether it's a long way off or just around the corner, we'll help you save for the retirement you deserve.
If you want to invest and build wealth over time, then this is the goal for you. This is an excellent goal type for unknown future needs or money you plan to pass to future generations.