Portfolios

The behavioral case for bonds Mar 6, 2026 10:03:14 AM How bonds can build a buffer that makes your portfolio more resilient, and you more likely to stay invested Key takeaways Bonds are loans investors make to companies, governments, and other entities in exchange for interest. Although their historical returns are lower than stocks, their relative stability makes them an ideal buffer during bouts of market volatility. Bonds can help investors stay in the game and preserve capital for the next market recovery. Betterment makes it simple to mix them into your portfolio now and adjust along the way. When most of us think about investing, we think about the flashy headlines of the stock market, the ups and downs of brand names and the companies behind them. Bonds, by contrast, can feel boring. But they’re often the unsung heroes of a well-balanced portfolio. They help smooth out your investing journey, making it more likely you stay in the wealth-building game. So, what exactly is a bond? At its simplest, a bond is a glorified loan, but one that you make, not the other way around. You’re lending your money to an entity (usually a company or government) for a set period, and in exchange, they promise to pay you back the full amount on a specific date, plus a little extra interest (aka “yield”) along the way. Bonds commonly break down along two lines: Investment-grade bonds — These are issued by less risky, more creditworthy entities and offer lower yields as a result. The U.S. government is one of the biggest players here—issuing tens of billions in Treasury bonds—but corporate bonds also play a role. High-yield bonds — Bonds issued by riskier, less creditworthy players (both corporate and government) and carrying higher yields in turn. These types of bonds are often under-represented in funds that track a pre-set list of bonds, meaning there’s more potential for higher returns with the right active management. For most of the 2010s, interest rates were stuck near zero, which meant bonds of all kinds weren't paying much. But the landscape has shifted since the pandemic. Since then, the "boring" part of your portfolio is actually working quite hard, offering yields that look a lot more attractive than they used to. Why bonds matter, regardless of your goal’s timeline If you’re in your 20s or 30s, you may think, “I’ve got 30 years to grow my money. Why not just go 100% stocks?” It’s not the craziest idea. Over longer periods, stocks generally outperform bonds. But investing isn't just a math problem; it's a psychology problem. The real danger to your wealth isn't a market dip—it's you hitting the "sell" button during a market dip because the choppy waters feel like too much to bear. Bonds can help calm the storm in this sense. When the stock market has a bad week (or a bad year), they tend to hold more of their value, or even gain in value. They also generally continue to pay out interest. This in theory means your overall portfolio experiences smaller dips, and it’s a lot easier to stay invested when your portfolio is down 15% instead of 30%. Bonds can also help preserve your portfolio’s precious capital, meaning there’s more fuel for the fire as stocks recover and grow beyond their pre-dip levels. This is why our allocation advice for even the longest of timelines still includes some bonds. Putting bonds into practice (and your portfolio) So how do you actually "do" bond investing without spending your weekends reading government balance sheets? You shouldn’t have to be an expert to benefit from a sophisticated bonds strategy. That’s why most of our portfolios include a globally-diversified mix of both stocks and bonds, with bond allocations that can automatically increase as your goal’s target date nears. You can also manually dial your amount of bonds up or down at any time—we’ll even preview the potential tax impact of the changes you’re considering. In certain cases, one of our bonds-only portfolios may make even more sense. For investors looking to generate income (e.g. retirees), for example, we offer the BlackRock Target Income portfolio. And for those with incomes falling in the 32% tax bracket or higher, we offer the Goldman Sachs Tax-Smart Bonds portfolio. It’s personalized based on customers’ unique tax situations and focuses on municipal bonds issued by state and local governments, which often offer tax-free interest at the federal level. The bottom line on bonds Bonds are rarely trendy, but their strong track record of stability can help cushion the chaos when market volatility hits next. Betterment’s lineup of stock and bond portfolios make it easy to mix some into your investing today, then adjust as you go. Because your right amount of bonds is whatever helps you stay invested.

Three ways it can pay to automate your investing Jan 30, 2026 6:00:00 AM Our managed offering adds value beyond a DIY approach. Here’s how. Key takeaways Portfolio construction is just the beginning. Betterment’s automated investing is designed to help you manage risk, maximize returns, and minimize leg work. Tax-smart features help you keep more of what you earn. Fully-automated Tax Coordination and tax-loss harvesting seek out efficiencies hard to replicate by hand. Navigation helps keep your goals on track. Automated rebalancing, effortless glide paths, and recurring deposits make it easier to stay the course through market ups and downs. Peace of mind is part of the return. Automation frees up time and headspace, letting you live your life instead of worrying about your portfolio. With the arrival of self-directed investing at Betterment, you can choose from thousands of individual stocks and ETFs on your own, including the very same funds we research and select for our curated portfolios. So if you can now buy the same low-cost investments, why pay someone (i.e., us) to manage them for you? It’s a fair question, and to help answer it, it helps to understand why our portfolio construction is just the beginning of the story. It's not just the Betterment portfolio you see today, but the one you see tomorrow (and in the weeks, months, and years that follow) that captures the full value of our expertise and technology. The ongoing optimization and evolution of your portfolio, in other words, is where our automated investing really shines. Sometimes the benefits are tangible. Sometimes they’re emotional. But regardless of how you frame it, we’re constantly working in the background to deliver value in three big ways. Tax savings: keeping more of what you earn Navigation: keeping your investing on-track Calm: keeping your sanity—and your spare time 1. Tax savings: keeping more of what you earn One of the most reliable ways to increase your returns is lowering the taxes owed on your investments. And here's the first way Betterment’s managed portfolios can pay off. Our trading algorithms take tax optimization to a level that’s practically impossible to replicate on your own. Take our Tax Coordination feature, which uses the flexibility of our portfolios to locate assets strategically across Betterment traditional IRAs/401(k)s, Roth IRAs/401(k)s, and taxable accounts. This mathematically-rigorous spin on asset location can help more of your earnings grow tax-free. Then there’s our fully-automated tax-loss harvesting, a feature designed to free up money to invest that would've otherwise gone to Uncle Sam. Our technology regularly scans accounts to identify harvesting opportunities, then goes to work. It’s how we harvested nearly $60 million in losses for customers during the tariff-induced market volatility of Spring 2025. Betterment does not provide tax advice. TLH is not suitable for all investors. Learn more. It’s also a big reason why nearly 70% of customers using our tax-loss harvesting feature had their taxable advisory fee covered by likely tax savings.1 And with the upcoming addition of direct indexing to Betterment’s automated investing, our harvesting capabilities will only continue to grow. 1Based on 2022-2023. Tax Loss Harvesting (TLH) is not suitable for all investors. Consider your personal circumstances before deciding whether to utilize Betterment’s TLH feature. Fee coverage and estimated tax savings based on Betterment internal calculations. See more in disclosures. 2. Navigation: keeping your investing on-track It’s easy to veer off-course when managing your own investing. Life happens, calendars fill up, and the next thing you know, your portfolio starts to drift. When you pay for automated investing, however, you not only get our guidance upfront, you benefit from technology designed to get you to your destination with less effort. As markets ebb and flow, for example, we automatically rebalance your portfolio to maintain your desired risk level. And the “glide path” that automatically lowers your risk as your goal nears? It just happens in eligible portfolios. No research or calendar reminders needed. Our management also helps steer your investing toward a time-tested path to long-term wealth. Most of our portfolios are globally diversified so you take advantage when overseas markets outperform. And we encourage recurring deposits so you buy more shares when prices are low. Recent research by Morningstar helps quantify the value of this “dollar-cost averaging” approach. They found investors lost out on roughly 15% of the returns their funds generated due in large part to jumping in and out of the market. Betterment customers using recurring deposits, meanwhile, earned nearly ~4% higher annual returns.2 It turns out it’s easier to stay the course with a little help. 2Based on Betterment’s internal calculations for the Core portfolio over 5 years. Users in the “auto-deposit on” groups earned an additional 0.6% over the last year and 1.6% annualized over 10 years. See more in disclosures. 3. Calm: Keeping your sanity—and your spare time Our automation can save you time—two hours for each rebalance alone3—but the value of automating your investing is more than just time saved. It’s quality time spent. How much of your finite energy, in other words, are you spending worrying about your money? We can’t erase all of your anxiety, but our team and our tech can empower you to build wealth with confidence and ease, with an emphasis on the ease. 3Based on internal data for a client with one account subject to Betterment’s TaxMin methodology and no other tax features enabled. Betterment will not automatically rebalance a portfolio until it meets or exceeds the required account balance. Between market volatility and a constant barrage of scary headlines, the world is stressful enough right now. There’s little need to add portfolio optimization and upkeep to the list. That is, of course, unless you enjoy it. But many of us don’t. The majority of Betterment customers we surveyed said they hold most of their assets in managed accounts, with self-directed investing serving as a side outlet for exploration. That’s why we offer both ways to invest at Betterment. The payoff is personal Investing performance and price are often measured down to the hundredth of a percentage point. That’s “zero point zero one percent” (0.01%), also known as a “basis point" or "bip" for short. Here at Betterment, it’s our mission to make every one of the 25 bips we most commonly charge worth it. We measure our portfolio’s performance after those fees, so you see what you’ve really earned. And we don’t stop there. With direct indexing and fully paid securities lending coming soon to automated investing, you’ll get even more ways to make your money work harder.

How we make market downturns less scary Jan 29, 2026 4:30:00 AM And how it can benefit your investing’s bottom line. The recent round of tariffs and trade wars have roiled markets, offering the latest example of investing’s inherent volatility. The fact that market drops do happen, and happen with some regularity, means that managing them is not only possible but paramount. "It's not about whether you're right or wrong," the investor George Soros once quipped. "But how much money you make when you're right, and how much you lose when you're wrong." Mitigating losses, in other words, matters just as much as maximizing gains. And this is true for two important reasons: The bigger the loss, the more tempted you may be to sell assets and lock in those losses. The bigger the loss, the less fuel for growth you have when the market does rebound. Point A is psychological, while Point B is mathematical, so let’s take each one separately. In the process, we’ll explain how we build our portfolios to not only weather the storm, but soak up as many rays as possible when the sun shines again. Smoothing out your investing journey Imagine you’re given a choice of rides: one’s a hair-raising roller coaster, the other a bike ride through a series of rolling hills. Sure, thrill seekers may choose the first option, but we think most investors would prefer the latter, especially if the ride in question lasts for decades. So to smooth things out, we diversify. Owning a mix of asset types can help soften the blow on your portfolio when any one particular type underperforms. Our Core portfolio, for example, features a blend of asset types like U.S. stocks and global bonds. The chart below shows how those asset types have performed individually since 2018, compared with the blended approach of a 90% stocks, 10% bonds allocation of Core. As you can see, Core avoids the big losses that individual asset classes experience on the regular. That’s one reason why through all the ups and downs of the past 15 years, it’s delivered ~10% in composite annual-weighted returns after fees since its launch1. 1As of 12/31/2025, and inception date 9/7/2011. Composite annual time-weighted returns: 20.1% over 1 year, 9.3% over 5 years, and 10.1% over 10 years. Composite performance calculated based on the dollar-weighted average of actual client time-weighted returns for the Core portfolio at 90/10 allocation, net of fees, includes dividend reinvestment, and excludes the impact of cash flows. Performance not guaranteed, investing involves risk. Core’s exposure to global bonds and international stocks has also helped its cause, given their outperformance relative to U.S. stocks year-to-date amidst the current market volatility of 2025. A smoother ride can take your money farther Downside protection is all the more important when considering the “math of losses.” We’ll be the first to admit it’s hard math to follow, but it boils down to this: as a portfolio’s losses rack up, the gains required to break even grow exponentially. The chart below illustrates this with losses in blue, and the gains required to be made whole in orange. Notice how their relationship is anything but 1-to-1. This speaks to the previously-mentioned Point B: The bigger your losses, the less fuel for growth you have in the future. Investors call this “volatility drag,” and it’s why we carefully weigh the risk of an investment against its expected returns. By sizing them up together, expressed as the Sharpe ratio, we can help assess whether the reward of any particular asset justifies its risk. This matters because building long-term wealth is a marathon, not a race. It pays to pace yourself. And yet, there will still be bumps in the road Because no amount of downside protection will get rid of market volatility altogether. It’s okay to feel worried during drops. But hopefully, with more information on our portfolio construction and automated tools like tax loss harvesting, you can ride out the storm with a little more peace-of-mind. And if you’re looking for even more reassurance, consider upgrading to Betterment Premium and talking with our team of advisors.

Betterment’s portfolio construction methodology Jan 7, 2026 8:00:00 AM Learn more about the process that underpins all the portfolios we build on behalf of customers. Table of contents Introduction Global diversification and asset allocation Portfolio optimization Tax management using municipal bonds The Value Tilt portfolio strategy The Innovative Technology portfolio strategy The Socially Responsible Investing portfolio strategies Conclusion Citations I. Introduction Betterment builds investment portfolios designed to help you make the most of your money and live the life you want. This guide lays out our portfolio construction process, one informed by real-world evidence and systematic decision-making. The Betterment Core portfolio serves as the foundation for all of the globally-diversified portfolios we construct. From there, specific adjustments are applied to other portfolios based on the investment objective of their particular strategies. These adjustments include additional allocations to value-focused or innovative stocks, or adherence to Socially Responsible Investing (SRI) criteria. For more information on the third-party portfolios we offer, such as the Goldman Sachs Smart Beta portfolio, see their respective pages and disclosures. When building a portfolio, any investment manager faces two main tasks: asset class selection and portfolio optimization. We detail our approach to these in the sections that follow. Our fund selection process, while equally as important, is covered in a separate methodology. II. Global diversification and asset allocation An optimal asset allocation is one that lies on the efficient frontier, which is a set of portfolios that seek to achieve the maximum objective for any given feasible level of risk. The objective of most long-term portfolio strategies is to maximize return for a given level of risk, which is measured in terms of volatility—the dispersion of those returns. In line with our approach of making systematic decisions backed by research, Betterment’s asset allocation is based on a theory by economist Harry Markowitz called Modern Portfolio Theory.1 A major tenet of Modern Portfolio Theory is that any asset included in a portfolio should not be assessed by itself, but rather, its potential risk and return should be analyzed as a contribution to the whole portfolio. Modern Portfolio Theory seeks to maximize expected return given an expected risk level or, equivalently, minimize expected risk given an expected return. Other forms of portfolio construction may legitimately pursue other objectives, such as optimizing for income, or minimizing loss of principal. Asset class selection Our approach to asset allocation starts with a universe of investable assets, which could be thought of as the “global market” portfolio.2 To capture the exposures of the asset classes for the global market portfolio, we evaluate available exchange-traded funds (ETFs) that represent each class in the theoretical market portfolio. We base our asset class selection on ETFs because this aligns portfolio construction with our fund selection methodology. All of our portfolios are constructed of the following asset classes: Stocks U.S. stocks International developed market stocks Emerging market stocks Bonds U.S. short-term treasury bonds U.S. inflation-protected bonds U.S. investment-grade bonds U.S. municipal bonds International developed market bonds Emerging market bonds We select U.S. and international developed market stocks as a core part of the portfolio. Historically, stocks exhibit a high degree of volatility, but provide some degree of inflation protection. Even though significant historical drawdowns, such as the global financial crisis in 2008 and pandemic outbreak in 2020, demonstrate the possible risk of investing in stocks, longer-term historical data and our forward expected returns calculations suggest that developed market stocks remain a core part of any asset allocation aimed at achieving positive returns. This is because, over the long term, developed market stocks have tended to outperform bonds on a risk-adjusted basis. To achieve a global market portfolio, we also include stocks from less developed economies, called emerging markets. Generally, emerging market stocks tend to be more volatile than U.S. and international developed stocks. And while our research shows high correlation between this asset class and developed market stocks, their inclusion on a risk-adjusted basis is important for global diversification. Note that we exclude frontier markets, which are even smaller than emerging markets, due to their widely-varying definition, extreme volatility, small contribution to global market capitalization, and cost to access. We incorporate bond exposure because, historically, bonds have a low correlation with stocks, and they remain an important way to dial down the overall risk of a portfolio. To promote diversification and leverage various risk and reward tradeoffs, we include exposure to several asset classes of bonds. Asset classes excluded from Betterment portfolios While Modern Portfolio Theory would have us craft a portfolio to represent the total market, including all available asset classes, we exclude some asset classes whose cost and/or lack of data outweighs the potential benefit gained from their inclusion. Our portfolio construction process excludes commodities and natural resources asset classes. Specifically, while commodities represent an investable asset class in the global financial market, we have excluded commodities ETFs because of their low contribution to a global stock/bond portfolio's risk-adjusted return. In addition, real estate investment trusts (REITs), which tend to be well marketed as a separate asset class, are not explicitly included in our portfolios. We do provide exposure to real estate, but as a sector within stocks. Adding additional real estate exposure by including a REIT asset class would overweight the exposure to real estate relative to the overall market. Incorporating awareness of a benchmark Before 2024, we managed our portfolios in a “benchmark agnostic” manner, meaning we did not incorporate consideration of global stock and bond indices in our portfolio optimization, though we have always sought to optimize the expected risk-adjusted return of the portfolios we construct for clients. The “risk” element of this statement represents volatility and the related drawdown potential of the portfolio, but it could also represent the risk in the deviation of the portfolio’s performance relative to a benchmark. In an evolution of our investment process, in 2024 we updated our portfolio methodology to become “benchmark aware,” as we now calibrate our exposures based on a custom benchmark that expresses our preference for diversifying across global stocks and bonds. A benchmark, which comes in the form of a broad-based market index or a combination of indices, serves as a reference point when approaching asset allocation, understanding investment performance, and aligning the expectations of portfolio managers and clients. In our case, we created a custom benchmark that most closely aligns with our future expectations for global markets. The custom benchmark we have selected is composed of: The MSCI All Country World stock IMI index (MSCI ACWI IMI) The Bloomberg U.S. Universal Bond index The S&P US Treasury Bond 0-1 Year Index (for <40% stock allocations) Our custom benchmark is composed of 101 risk levels of varying percentage weightings of the stock and bond indexes, which correspond to the 101 risk level allocations in our Core portfolio. At low risk levels (allocations that are less than 40% stocks), we layer an allocation to the S&P US Treasury Bond 0-1 Year Index, which represents short-term bonds, into the blended benchmark. We believe that incorporating this custom benchmark into our process reinforces the discipline of carefully evaluating the ways in which our portfolios’ performance could veer from global market indices and deviate from our clients’ expectations. We have customized the benchmark with 101 risk levels so that it serves clients’ varying investment goals and risk tolerances. As we will explore in the following section, establishing a benchmark allows us to apply constraints to our portfolio optimization that ensures the portfolio’s asset allocation does not vary significantly from the geographic and market-capitalization size exposures of a sound benchmark. Our benchmark selection also makes explicit that the portfolio delivers global diversification rather than the more narrowly-concentrated and home-biased exposures of other possible benchmarks such as the S&P 500. III. Portfolio optimization As an asset manager, we fine-tune the investments our clients hold with us, seeking to maximize return potential for the appropriate amount of risk each client can tolerate. We base this effort on a foundation of established techniques in the industry and our own rigorous research and analysis. While most asset managers offer a limited set of model portfolios at a defined risk scale, our portfolios are designed to give customers more granularity and control over how much risk they want to take on. Instead of offering a conventional set of three portfolio choices—aggressive, moderate, and conservative—our portfolio optimization methods enable our Core portfolio strategy to be customized to 101 different stock-bond risk levels. Optimizing portfolios Modern Portfolio Theory requires estimating variables such as expected-returns, covariances, and volatilities to optimize for portfolios that sit along an efficient frontier. We refer to these variables as capital market assumptions (CMAs), and they provide quantitative inputs for our process to derive favorable asset class weights for the portfolio strategy. While we could use historical averages to estimate future returns, this is inherently unreliable because historical returns do not necessarily represent future expectations. A better way is to utilize the Capital Asset Pricing Model (CAPM) along with a utility function which allows us to optimize for the portfolio with a higher return for the risk that the investor is willing to accept. Computing forward-looking return inputs Under CAPM assumptions, the global market portfolio is the optimal portfolio. Since we know the weights of the global market portfolio and can reasonably estimate the covariance of those assets, we can recover the returns implied by the market.3 This relationship gives rise to the equation for reverse optimization: μ = λ Σ ωmarket Where μ is the return vector, λ is the risk aversion parameter, Σ is the covariance matrix, and ωmarket is the weights of the assets in the global market portfolio.5 By using CAPM, the expected return is essentially determined to be proportional to the asset’s contribution to the overall portfolio risk. It’s called a reverse optimization because the weights are taken as a given and this implies the returns that investors are expecting. While CAPM is an elegant theory, it does rely on a number of limiting assumptions: e.g., a one period model, a frictionless and efficient market, and the assumption that all investors are rational mean-variance optimizers.4 In order to complete the equation above and compute the expected returns using reverse optimization, we need the covariance matrix as an input. This matrix mathematically describes the relationships of every asset with each other as well as the volatility risk of the assets themselves. In another more recent evolution of our investment process, we also attempt to increase the robustness of our CMAs by averaging in the estimates of expected returns and volatilities published by large asset managers such as BlackRock, Vanguard, and State Street Global Advisors. We weight the contribution of their figures to our final estimates based on our judgment of the external provider’s methodology. Constrained optimization for stock-heavy portfolios After formulating our CMAs for each of the asset classes we favor for inclusion in our portfolio methodology, we then solve for target portfolio allocation weights (the specific set of asset classes and the relative distribution among those asset classes in which a portfolio will be invested) with the range of possible solutions constrained by limiting the deviation from the composition of the custom benchmark. To robustly estimate the weights that best balance risk and return, we first generate several thousand random samples of 15 years of expected returns for the selected asset classes based on our latest CMAs, assuming a multivariate normal distribution. For each sample of 15 years of simulated expected return data, we find a set of allocation weights subject to constraints that provide the best risk-return trade-off, expressed as the portfolio’s Sharpe ratio, i.e., the ratio of its return to its volatility. Averaging the allocation weights across the thousands of return samples gives a single set of allocation weights optimized to perform in the face of a wide range of market scenarios (a “target allocation”). The constraints are imposed to make the portfolio weights more benchmark-aware by setting maximum and minimum limits to some asset class weights. These constraints reflect our judgment of how far the composition of geographic regions within the portfolio’s stock and bond allocations should differ from the breakdown of the indices used in the benchmark before the risk of significantly varied performance between the portfolio strategy and the benchmark becomes untenable. For example, the share of the portfolio’s stock allocation assigned to international developed stocks should not be profoundly different from the share of international developed stocks within the MSCI ACWI IMI. We implement caps on the weights of emerging market stocks and bonds, which are often projected to have high returns in our CMAs, and set minimum thresholds for U.S. stocks and bonds. This approach not only ensures our portfolio aligns more closely with the benchmark, but it also mitigates the risk of disproportionately allocating to certain high expected return asset classes. Constrained optimization for bond-heavy portfolios For Betterment portfolios that have more than or equal to a 60% allocation of bonds, the optimization approach differs in that expected returns are maximized for target volatilities assigned to each risk level. These volatility targets are determined by considering the volatility of the equivalent benchmark. Manually established constraints are designed to manage risk relative to the benchmark, instituting a declining trend in emerging market stock and bond exposures as stock allocations (i.e., the risk level) decreases. Meaning that investors with more conservative risk tolerances have reduced exposures to emerging market stocks and bonds because emerging markets tend to have more volatility and downside-risk relative to more established markets. Additionally, as the stock allocation percentage decreases, we taper the share of international and U.S. aggregate bonds within the overall bond allocation, and increase the share of short-term Treasury, short-term investment grade, and inflation-protected bonds. This reflects our view that investors with more conservative risk tolerances should have increased exposure to short-term Treasury, short-term investment grade, and inflation-protected bonds relative to riskier areas of fixed income. The lower available risk levels of our portfolios demonstrate capital preservation objectives, as the shorter-term fixed income exposures likely possess less credit and duration risk. Clients invested in the Core portfolio at conservative allocation levels will likely therefore not experience as significant drawdowns in the event of waves of defaults or upward swings in interest rates. Inflation-protected securities also help buffer the lower risk levels from upward drafts in inflation. IV. Tax management using municipal bonds For investors with taxable accounts, portfolio returns may be further improved on an after-tax basis by utilizing municipal bonds. This is because the interest from municipal bonds is exempt from federal income tax. To take advantage of this, we incorporate municipal bonds within the bond allocations of taxable accounts. Other types of bonds remain for diversification reasons, but the overall bond tax profile is improved by incorporating municipal bonds. For investors in states with some of the highest tax rates—New York and California—Betterment can optionally replace the municipal bond allocation with a more narrow set of bonds for that specific state, further saving the investor on state taxes. Betterment customers who live in NY or CA can contact customer support to take advantage of state-specific municipal bonds. V. The Value Tilt portfolio strategy Existing Betterment customers may recall that historically the Core portfolio held a tilt to value companies, or businesses that appear to be potentially undervalued based on metrics such as price-to-earnings (P/E) ratios. Recent updates, however, have deprecated this explicit tilt that was expressed via large-, mid-, and small-capitalization U.S. value stock ETFs, while maintaining some exposure to value companies through broad market U.S. stock funds. We no longer favor allocating to value stock ETFs within our portfolio methodology in large part as a result of our adoption of a broad market benchmark, which highlights the idiosyncratic nature of such tilts, sometimes referred to as “off benchmark bets.” We believe our chosen benchmark that represents stocks through the MSCI ACWI IMI, which holds a more neutral weighting to value stocks, more closely aligns with the risk and return expectations of Betterment’s diverse range of client types across individuals, financial advisors, and 401(k) plan sponsors. Additionally, as markets have grown more efficient and value factor investing more popularized, potentially compressing the value premium, we have a marginally less favorable view of the forward-looking, risk-adjusted return profile of the exposure. That being said, we have not entirely lost conviction in the research supporting the prudence of value investing. The value factor’s deep academic roots drove decisions to incorporate the value tilt into Betterment’s portfolios from our company’s earliest days. For investors who wish to remain invested in a value strategy, we have added the Value Tilt portfolio, a separate option from the Core portfolio, to our investing offering. The Value Tilt portfolio maintains the Core portfolio’s global diversification across stocks and bonds while including a sleeve within the stock allocation of large-, mid-, and small-capitalization U.S. value funds. We calibrated the size of the value fund exposure based on a certain target historical tracking error to the backtested performance of the latest version of the Core portfolio. Based on this approach, investors should expect the Value Tilt portfolio to generally perform similarly to Core, with the potential to under- or outperform based on the return of U.S. value stocks. With the option to select between the Value Tilt portfolio or a Core portfolio now without an explicit allocation to value, the investment flexibility of the Betterment platform has improved. VI. The Innovative Technology portfolio strategy In 2021, Betterment launched the Innovative Technology portfolio to provide access to the thematic trend of technological innovation. The portfolio’s investment premise is based upon the thesis that, over the long term, the companies innovating and disrupting their respective industries are shaping our global economy and may be the winners of the next industrial revolution. Some of these themes the portfolio seeks to provide increased exposure to are: Artificial intelligence Alternative finance Clean energy Manufacturing Biotechnology Similar to the Value Tilt portfolio, the Core portfolio is used as the foundation of construction for the Innovative Technology portfolio. With this portfolio strategy, we calibrated the size of the innovative technology funds’ exposure based on a certain target historical tracking error to the backtested performance of the latest version of the Core portfolio. Through this process, the Innovative Technology portfolio maintains the same globally-diversified, low-cost approach that is found in Betterment’s investment philosophy. The portfolio, however, has increased exposure to risk given that innovation requires a long-term view, and may face uncertainties along the way. It may outperform or underperform depending on the return experience of the innovative technology funds’ exposure and the thematic landscape. To learn more, read the Innovative Technology portfolio disclosure. VII. The Socially Responsible Investing portfolio strategies Betterment introduced its first Socially Responsible Investing (SRI) portfolio in 2017 and has since expanded the options to include three distinct portfolios: Broad Impact, Social Impact, and Climate Impact. These SRI portfolios are built on the same foundational principles as the Core portfolio, utilizing various asset classes to create globally-diversified portfolios. However, they incorporate socially-responsible ETFs that align with specific Environmental, Social, and Governance (ESG) and shareholder engagement mandates, tailored to each SRI focus. Betterment’s SRI approach emphasizes three core dimensions: Reducing exposure to companies engaged in unsustainable activities Increasing investments in those addressing environmental and social challenges Allocating to funds that utilize shareholder engagement to promote responsible corporate behavior. This methodology ensures diversified, cost-efficient portfolios that resonate with investors' values. For more information, read our full Socially Responsible Investing portfolios methodology. VIII. Conclusion After setting the strategic weight of assets in our various Betterment portfolios, the next step in implementing the portfolio construction process is our fund selection methodology, which selects the appropriate ETFs for the respective asset exposure in a generally low-cost, tax-efficient way. In keeping with our philosophy, that process, like our portfolio construction process, is executed in a systematic, rules-based way, taking into account the cost of the fund and the liquidity of the fund. Beyond ticker selection is our established process for allocation management—how we advise downgrading risk over time. The level of granularity in allocation management provides the flexibility to align to multiple goals with different timelines and circumstances. Most of our portfolios contain 101 individualized risk levels (each with a different percentage of the portfolio invested in stocks vs. bonds, informed by your financial goals, time horizon and risk tolerance). Finally, our overlay features of automated rebalancing, tax-loss harvesting, and our methodology for automatic asset location, which we call Tax Coordination, are designed to be used to help further maximize individualized, after-tax returns. Together these processes put our principles into action, to help each and every Betterment customer maximize value while invested at Betterment and when they take their money home. IX. Citations 1 Markowitz, H., "Portfolio Selection".The Journal of Finance, Vol. 7, No. 1. (Mar., 1952), pp. 77-91. 2 Black F. and Litterman R., Asset Allocation Combining Investor Views with Market Equilibrium, Journal of Fixed Income, Vol. 1, No. 2. (Sep., 1991), pp. 7-18. Black F. and Litterman R., Global Portfolio Optimization, Financial Analysts Journal, Vol. 48, No. 5 (Sep. - Oct., 1992), pp. 28-43. 3 Litterman, B. (2004) Modern Investment Management: An Equilibrium Approach. 4 Note that the risk aversion parameter is essentially a free parameter. 5 Ilmnen, A., Expected Returns.

Refreshed portfolios are right around the corner Jan 5, 2026 8:30:00 AM New actively-managed bonds, fine-tuned U.S. exposure, and lower crypto costs highlight this year’s portfolio updates. Key takeaways As part of our automated investing offering, we regularly update our portfolios to ensure they reflect the latest long-term market forecasts. This year’s updates will be rolling out soon and require no action on the part of Betterment customers. They include a new actively-managed bond fund, small tweaks to U.S. stock and bond allocations, and lower crypto ETF costs. Between tariffs, AI, and shutdowns, investors faced all sorts of uncertainty in 2025. But if you're invested in a Betterment-built portfolio, you don't have to worry whether your investing is keeping up with the times. That’s because we update our portfolios each year based on the latest long-term forecasts. These updates include adjusting the weights of various asset classes, as well as swapping in new funds that deliver lower costs and/or better exposure. They're just a few of the ways our automated investing delivers value, and they’ll be rolling out soon. So without further ado, let’s preview what's new for 2026: Expanded access to bond markets Fine-tuned U.S. exposure Lower crypto ETF costs Expanded access to bond markets Passive investing—tracking preset indexes or lists of investments—is still the bedrock of our portfolio strategy thanks to its low costs and strong track record, but it has limitations in the world of fixed income. That’s because many passively-managed bond funds reflect only a portion of the total market. And it’s these under-represented sectors—high-yield and securitized offerings, among others—that can help investors capitalize on changing market conditions like falling interest rates. So to take advantage of these opportunities, we’re making a new actively-managed bond fund a central piece of the following portfolios’ bond allocations: Core Innovative Tech Value Tilt Flexible portfolio US-only portfolio (exclusive to Betterment Premium and not available in Betterment 401(k)s) While the bond market is relatively ripe for active management, much of that edge hinges on the expertise of the team who manages the fund. That’s why when using these types of funds in our portfolios, we use a robust quantitative and qualitative method to size up fund managers. Fine-tuned U.S. exposure Similar to last year, we’re making minor adjustments to our allocation of U.S. stocks. This allocation breaks down along three subasset classes, with each defined by their underlying companies’ current market valuations: Small-cap (less than $2 billion) Mid-cap (between $2 billion and $10 billion) Large-cap (more than $10 billion) We’re dialing down exposure to mid-cap stocks—bringing their allocation in line with small-cap—and in turn increasing our allocation to large-cap stocks. These changes apply to the same portfolios above, and better align them with the relative size of each subasset class within the stock market. Beyond these tweaks, some risk levels of our portfolios (including all three of our Socially Responsible Investing portfolios) may see modest increases in exposure to short-term Treasuries. This helps smooth out the glide path for customers using our auto-adjust feature and de-risk their investing as target dates near. Lower crypto ETF costs In the Betterment Crypto ETF portfolio (not available in Betterment 401(k)s), we’re increasing our bitcoin allocation to align with its market capitalization weight. Further changes include swapping in lower-cost funds, which reduces the portfolio’s weighted average expense ratio by 0.10%. As part of our fund selection methodology, we continually look for opportunities to lower investing costs as new funds become available. For more information on the Crypto ETF portfolio, please see the portfolio disclosure. Sit back and enjoy the switch Similar to last year’s portfolio updates, we’ll gradually implement this year’s changes in the weeks to come, with our technology designed to seek the most tax-efficient path for taxable accounts. Tax-advantaged accounts such as Betterment IRAs and Betterment 401(k)s won’t see any tax impact as a result of these updates. To find the refreshed portfolio weights, check out the relevant portfolio pages on our website. Customers can also see their updated holdings in the Betterment app with only a few clicks. It’s yet another example of how we make it easy to be invested.

Betterment's Socially Responsible Investing portfolios methodology Dec 17, 2025 8:00:00 AM Learn how we construct our Socially Responsible Investing (SRI) portfolios. Table of Contents Introduction How do we define SRI? The Challenges of SRI Portfolio Construction How is Betterment’s Broad Impact portfolio constructed? How is Betterment’s Climate Impact portfolio constructed? How is Betterment’s Social Impact portfolio constructed? Conclusion Introduction Betterment launched its first Socially Responsible Investing (SRI) portfolio in 2017, and has widened the investment options under that umbrella since then. Within Betterment’s SRI options, we currently offer a Broad Impact portfolio and two additional, more focused SRI portfolio options: a Social Impact SRI portfolio (focused on social empowerment) and a Climate Impact SRI portfolio (focused on climate-conscious investments). These portfolios represent a diversified, relatively low-cost solution constructed using exchange traded funds (ETFs), which will be continually improved upon as costs decline, more data emerges, and as a result, the availability of SRI funds broadens. How do we define SRI? Our approach to SRI has three fundamental dimensions that shape our portfolio construction mandates: Reducing exposure to investments involved in unsustainable activities and environmental, social, or governmental controversies. Increasing exposure to investments that work to address solutions for core environmental and social challenges in measurable ways. Allocating to investments that use shareholder engagement tools, such as shareholder proposals and proxy voting, to incentivize socially responsible corporate behavior. SRI is the traditional name for the broad concept of values-driven investing (many experts now favor “sustainable investing” as the name for the entire category). Our SRI approach uses SRI mandates based on a set of industry criteria known as “ESG,” which stands for Environmental, Social and Governance. ESG refers specifically to the quantifiable dimensions of a company’s standing along each of its three components. Betterment’s approach expands upon the ESG-investing framework with exposure to investments that use complementary shareholder engagement tools. Betterment does not directly select companies to include in, or exclude from, the SRI portfolios. Rather, Betterment identifies ETFs that have been classified as ESG or similar by third-parties and considers internally developed “SRI mandates” alongside other qualitative and quantitative factors to select ETFs to include in its SRI portfolios. Using SRI Mandates One aspect of improving a portfolio’s ESG exposure is reducing exposure to companies that engage in certain activities that may be considered undesirable because they do not align with specific values. These activities may include selling tobacco, military weapons, civilian firearms, as well as involvement in recent and ongoing ESG controversies. However, SRI is about more than just adjusting your portfolio to minimize companies with a poor social impact. For each Betterment SRI portfolio, the portfolio construction process considers one or more internally developed “SRI mandates.” Betterment’s SRI mandates are sustainable investing objectives that we include in our portfolios’ exposures. SRI Mandate Description Betterment SRI Portfolio Mapping ESG Mandate ETFs tracking indices which are constructed with reference to some form of ESG optimization, which promotes exposure to Environmental, Social, and Governance pillars. Broad, Climate, Social Impact Portfolios Fossil Fuel Divestment Mandate ETFs tracking indices which are constructed with the aim of excluding stocks in companies with major fossil fuels holdings (divestment). Climate Impact Portfolio Carbon Footprint Mandate ETFs tracking indices which are constructed with the aim of minimizing exposure to carbon emissions across the entire economy (rather than focus on screening out exposure to stocks primarily in the energy sector). Climate Impact Portfolio Green Financing Mandates ETFs tracking indices focused on financing environmentally beneficial activities directly. Climate Impact Portfolio Gender Equity Mandate ETFs tracking indices which are constructed with the aim of representing the performance of companies that seek to advance gender equality. Social Impact Portfolio Social Equity Mandate ETFs managed with the aim of obtaining exposures in investments that seek to advance vulnerable, disadvantaged, or underserved social groups. The Gender Equity Mandate also contributes to fulfilling this broader mandate. Social Impact Portfolio Shareholder Engagement Mandate In addition to the mandates listed above, Betterment’s SRI portfolios are constructed using a shareholder engagement mandate. One of the most direct ways a shareholder can influence a company’s decision making is through shareholder proposals and proxy voting. Publicly traded companies have annual meetings where they report on the business’s activities to shareholders. As a part of these meetings, shareholders can vote on a number of topics such as share ownership, the composition of the board of directors, and executive level compensation. Shareholders receive information on the topics to be voted on prior to the meeting in the form of a proxy statement, and can vote on these topics through a proxy card. A shareholder can also make an explicit recommendation for the company to take a specific course of action through a shareholder proposal. ETF shareholders themselves do not vote in the proxy voting process of underlying companies, but rather the ETF fund issuer participates in the proxy voting process on behalf of their shareholders. As investors signal increasing interest in ESG engagement, more ETF fund issuers have emerged that play a more active role engaging with underlying companies through proxy voting to advocate for more socially responsible corporate practices. These issuers use engagement-based strategies, such as shareholder proposals and director nominees, to engage with companies to bring about ESG change and allow investors in the ETF to express a socially responsible preference. For this reason, Betterment includes a Shareholder Engagement Mandate in its SRI portfolios. Mandate Description Betterment SRI Portfolio Mapping Shareholder Engagement Mandate ETFs which aim to fulfill one or more of the above mandates, not via allocation decisions, but rather through the shareholder engagement process, such as proxy voting. Broad, Climate, Social Impact Portfolios The Challenges of SRI Portfolio Construction For Betterment, three limitations have a large influence on our overall approach to building an SRI portfolio: 1. Many existing SRI offerings in the market have serious shortcomings. Many SRI offerings today sacrifice sufficient diversification appropriate for investors who seek market returns, and/or do not provide investors an avenue to use collective action to bring about ESG change. Betterment’s SRI portfolios do not sacrifice global diversification. Consistent with our core principle of global diversification and to ensure both domestic and international bond exposure, we’re still allocating to some funds without an ESG mandate, until satisfactory solutions are available within those asset classes. Additionally, all three of Betterment’s SRI portfolios include a partial allocation to an engagement-based socially responsible ETF using shareholder advocacy as a means to bring about ESG-change in corporate behavior. Engagement-based socially responsible ETFs have expressive value in that they allow investors to signal their interest in ESG issues to companies and the market more broadly, even if particular shareholder campaigns are unsuccessful. 2. Integrating values into an ETF portfolio may not always meet every investor’s expectations. For investors who prioritize an absolute exclusion of specific types of companies above all else, certain approaches to ESG will inevitably fall short of expectations. For example, many of the largest ESG funds focused on US Large Cap stocks include some energy companies that engage in oil and natural gas exploration, like Hess. While Hess might not meet the criteria of the “E” pillar of ESG, it could still meet the criteria in terms of the “S” and the “G.” Understanding that investors may prefer to focus specifically on a certain pillar of ESG, Betterment has made three SRI portfolios available. The Broad Impact portfolio seeks to balance each of the three dimensions of ESG without diluting different dimensions of social responsibility. With our Social Impact portfolio, we sharpen the focus on social equity with partial allocations to gender diversity and veteran impact focused funds. With our Climate Impact portfolio, we sharpen the focus on controlling carbon emissions and fostering green solutions. 3. Most available SRI-oriented ETFs present liquidity limitations. While SRI-oriented ETFs have relatively low expense ratios compared to SRI mutual funds, our analysis revealed insufficient liquidity in many ETFs currently on the market. Without sufficient liquidity, every execution becomes more expensive, creating a drag on returns. Median daily dollar volume is one way of estimating liquidity. Higher volume on a given asset means that you can quickly buy (or sell) more of that asset in the market without driving the price up (or down). The degree to which you can drive the price up or down with your buying or selling must be treated as a cost that can drag down on your returns. To that end, Betterment reassesses the funds available for inclusion in these portfolios regularly. In balancing cost and value for the portfolios, the options are limited to funds of certain asset classes such as US stocks, Developed Market stocks, Emerging Market stocks, US Investment Grade Corporate Bonds, US High Quality bonds, and US Mortgage-Backed Securities. How is Betterment’s Broad Impact portfolio constructed? Betterment’s Broad Impact portfolio invests assets in socially responsible ETFs to obtain exposure to both the ESG and Shareholder Engagement mandates, as highlighted in the table above. It focuses on ETFs that consider all three ESG pillars, and includes an allocation to an engagement-based SRI ETF. Broad ESG investing solutions are currently the most liquid, highlighting their popularity amongst investors. In order to maintain geographic and asset class diversification and to meet our requirements for lower cost and higher liquidity in all SRI portfolios, we continue to allocate to some funds that do not reflect SRI mandates, particularly in bond asset classes. How is Betterment’s Climate Impact portfolio constructed? Betterment offers a Climate Impact portfolio for investors that want to invest in an SRI strategy more focused on the environmental pillar of “ESG” rather than focusing on all ESG dimensions equally. Betterment’s Climate Impact portfolio invests assets in socially responsible ETFs and is constructed using the following mandates that seek to achieve divestment and engagement: ESG, carbon footprint reduction, fossil fuel divestment, shareholder engagement, and green financing. The Climate Impact portfolio was designed to give investors exposure to climate-conscious investments, without sacrificing proper diversification and balanced cost. Fund selection for this portfolio follows the same guidelines established for the Broad Impact portfolio, as we seek to incorporate broad based climate-focused ETFs with sufficient liquidity relative to their size in the portfolio. How can the Climate Impact portfolio help to positively affect climate change? The Climate Impact portfolio is allocated to iShares MSCI ACWI Low Carbon Target ETF (CRBN), an ETF which seeks to track the global stock market, but with a bias towards companies with a lower carbon footprint. By investing in CRBN, investors are actively supporting companies with a lower carbon footprint, because CRBN overweights these stocks relative to their high-carbon emitting peers. One way we can measure the carbon impact a fund has is by looking at its weighted average carbon intensity, which measures the weighted average of tons of CO2 emissions per million dollars in sales, based on the fund's underlying holdings. Based on weighted average carbon intensity data from MSCI, Betterment’s 100% stock Climate Impact portfolio has carbon emissions per unit sales that are more than 47% lower than Betterment’s 100% stock Core portfolio as of March 12, 2025. Additionally, a portion of the Climate Impact portfolio is allocated to fossil fuel reserve funds. Rather than ranking and weighting funds based on a certain climate metric like CRBN, fossil fuel reserve free funds instead exclude companies that own fossil fuel reserves, defined as crude oil, natural gas, and thermal coal. By investing in fossil fuel reserve free funds, investors are actively divesting from companies with some of the most negative impact on climate change, including oil producers, refineries, and coal miners such as Chevron, ExxonMobile, BP, and Peabody Energy. Another way that the Climate Impact portfolio promotes a positive environmental impact is by investing in bonds that fund green projects. The Climate Impact portfolio invests in iShares Global Green Bond ETF (BGRN), which tracks the global market of investment-grade bonds linked to environmentally beneficial projects, as determined by MSCI. These bonds are called “green bonds.” The green bonds held by BGRN fund projects in a number of environmental categories defined by MSCI including alternative energy, energy efficiency, pollution prevention and control, sustainable water, green building, and climate adaptation. How is Betterment’s Social Impact portfolio constructed? Betterment offers a Social Impact portfolio for investors that want to invest in a strategy more focused on the social pillar of ESG investing (the S in ESG). Betterment’s Social Impact portfolio invests assets in socially responsible ETFs and is constructed using the following mandates: ESG, gender equity, social equity, and shareholder engagement. The Social Impact portfolio was designed to give investors exposure to investments which promote social empowerment without sacrificing proper diversification and balanced cost. Fund selection for this portfolio follows the same guidelines established for the Broad Impact portfolio discussed above, as we seek to incorporate broad based ETFs that focus on social empowerment with sufficient liquidity relative to their size in the portfolio. How does the Social Impact portfolio help promote social empowerment? The Social Impact portfolio shares many of the same holdings as Betterment’s Broad Impact portfolio. The Social Impact portfolio additionally looks to further promote the “social” pillar of ESG investing by allocating to the following ETFs: SPDR SSGA Gender Diversity Index ETF (SHE) Academy Veteran Impact ETF(VETZ) Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST) SHE is a US Stock ETF that allows investors to invest in more female-led companies compared to the broader market. In order to achieve this objective, companies are ranked within each sector according to their ratio of women in senior leadership positions. Only companies that rank highly within each sector are eligible for inclusion in the fund. By investing in SHE, investors are allocating more of their money to companies that have demonstrated greater gender diversity within senior leadership than other firms in their sector. VETZ, the Academy Veteran Impact ETF, is a US Bond ETF and is the first publicly traded ETF to primarily invest in loans to U.S. service members, military veterans, their survivors, and veteran-owned businesses. A majority of the underlying assets consist of loans to veterans or their families. The fund primarily invests in Mortgage-Backed Securities that are guaranteed by government-sponsored enterprises, such as Ginnie Mae, Fannie Mae, and Freddie Mac. The fund also invests in pools of small business loans backed by the Small Business Administration (SBA). JUST, Goldman Sachs JUST U.S. Large Cap Equity ETF, invests in U.S. companies promoting positive change on key social issues, such as worker wellbeing, customer privacy, environmental impact, and community strength, based on the values of the American public as identified by JUST Capital’s polling. Investment in socially responsible ETFs varies by portfolio allocation; not all allocations include the specific ETFs listed above. For more information about these social impact ETFs, including any associated risks, please see our disclosures. Should we expect any difference in an SRI portfolio’s performance? One might expect that a socially responsible portfolio could lead to lower returns in the long term compared to another, similar portfolio. The notion behind this reasoning is that somehow there is a premium to be paid for investing based on your social ideals and values. A white paper written in partnership between Rockefeller Asset Management and NYU Stern Center for Sustainable Business studied 1,000+ research papers published from 2015 to 2020 analyzing the relationship between ESG investing and performance. The primary takeaway from this research was that they found “positive correlations between ESG performance and operational efficiencies, stock performance, and lower cost of capital.” When ESG factors were considered in the study, there seemed to be improved performance potential over longer time periods and potential to also provide downside protection during periods of crisis. It’s important to note that performance in the SRI portfolios can be impacted by several variables, and is not guaranteed to align with the results of this study. Dividend Yields Could Be Lower Using the SRI Broad Impact portfolio for reference, dividend yields over a one-year period ending March 31, 2025 indicate that SRI income returns at certain risk levels have been lower than those of the Core portfolio. Oil and gas companies like BP, Chevron, and Exxon, for example, currently have relatively high dividend yields, and excluding them from a given portfolio can cause its income return to be lower. Of course, future dividend yields are uncertain variables and past data may not provide accurate forecasts. Nevertheless, lower dividend yields can be a factor in driving total returns for SRI portfolios to be lower than those of Core portfolios. Comparison of Dividend Yields Source: Bloomberg, Calculations by Betterment for one year period ending March 31, 2025. Dividend yields for each portfolio are calculated using the dividend yields of the primary ETFs used for taxable allocations of Betterment’s portfolios as of March 2025. Conclusion Despite the various limitations that all SRI implementations face today, Betterment will continue to support its customers in further aligning their values to their investments. Betterment may add additional socially responsible funds to the SRI portfolios and replace other ETFs as the investing landscape continues to evolve.

Can a portfolio be too simple? Dec 10, 2025 2:22:50 PM Total market funds offer simplicity, but by unbundling asset classes—and adding Betterment’s automation—you can make your money work harder. Key takeaways Single-fund portfolios are easy to build, but they’re harder to optimize for taxes and costs. Using multiple funds adds the flexibility to fine-tune allocations and unlock savings. Betterment’s automation and expert-built portfolios give you the best of both worlds: easy to invest in, and built to work harder. If you’re looking to build long-term wealth, you could do worse than investing in one or two low-cost, globally-diversified total market funds. But you could potentially do better—and spend less of your limited bandwidth—by using a few more pieces and putting our technology to work in your favor. That’s the value of Betterment’s automated investing and expert-built portfolios, and it begins with (surprise!) tax optimization. Harvesting losses for tax wins, and putting your assets in the right place Targeting more than a date Splitting hairs on fund fees, so customers can save millions Harvesting losses for tax wins, and putting your assets in the right place Tax-loss harvesting can help give your taxable investing an edge, and it happens when you sell an asset for a loss and replace it with a similar one. The downside of a total market fund, however, is you have to wait for the entire fund to experience a loss. If only one piece of it dips, you can’t unbundle the assets and harvest that specific piece. It’s sell all, or sell nothing. That’s a big reason why we switched from using a single fund for U.S. stocks in our Betterment-built portfolios, opting instead for three separate funds representing small, medium, and large-sized U.S. companies. If one of them presents a harvesting opportunity, we can swap it for a similar alternative. The second area where larger fund lineups shine is asset location, or strategically divvying up your portfolio’s assets among traditional, Roth, and/or taxable accounts. Stocks with the highest potential for growth, for example, are often better-suited for traditional accounts. Let them grow tax-free, the thinking goes, then settle up with Uncle Sam when you’re retired and more likely to be in a lower tax bracket. Our mathematically-rigorous spin on asset location is called Tax Coordination, and it’s yet another way our automated investing helps you keep more of what you earn. To start taking advantage of it, simply open any combination of the three account types above and follow a few easy steps. Targeting more than a date One of the most common single-fund options for retirement savings are target date funds. They date back to the 90s and became the default option in many 401(k) plans starting in the late 2000s. The growth of target date funds has been a good thing for investors, helping move the industry toward lower-cost, automated investing. Prior to their arrival, advisors had to manually adjust the asset allocations or “glide paths” of portfolios over time. Similar to total market funds, however, the bundling of target date funds brings with it some constraints. The first constraint is their relative lack of choice. Say you were born in 1988 and are targeting a traditional retirement age of 62. Most target date fund managers give you one option—the 2050 fund. Our automated investing, on the other hand, gives you more than a handful of portfolios to choose from, including ones tailored for social responsibility and innovation. More funds also creates more levers to fine-tune your exposure, helping manage risk in all sorts of situations. Take bond-heavy portfolios as an example. Rising interest rates can erode their value, so we dial up their exposure to short-term corporate debt and U.S. Treasuries specifically to help hedge against that risk. Splitting hairs on fund fees, so customers can save millions The relatively high cost of target date funds has been trending downward, and many total market funds can be found for expense ratios of less than 0.1%. But we can squeeze out even more savings by splitting a portfolio up and shopping for better deals. A single one hundredth of a percentage point in fund fees (what’s referred to as a “basis point” or “bip” in investing lingo) may not sound like much, but we owe it to our customers to make every one count. You could pay 6 basis points (0.06%), for example, for a total world stock fund like VT. Or you could pay one-third of that for your U.S. stock allocation by breaking it up into three funds (SPYM, SPMD, and SPSM) like we do with our Core portfolio and others. Using our customers’ nearly $20 billion worth of U.S. stocks as an example, that would amount to roughly $7.6 million in combined savings each year. Flexibility to stretch your investing dollars even farther A simple portfolio can be a great place to start, but it’s not always where your money works hardest. By strategically using a few more funds, we can sprinkle tax advantages on more of your investing, optimize across account types, and potentially unlock even more cost savings. All automatically. You get the simplicity you want, but with our tech doing the heavy lifting behind the scenes.

The proactive strategy behind passive investing Oct 13, 2025 11:35:02 AM And when actively-managed funds may give your portfolio an edge. Key takeaways Passive and active investing strategies both require proactive planning while differing in their end goals. Passive investing seeks to match market returns, typically by way of index or exchange traded funds that closely mirror a market. Passive funds cost significantly less on average and often perform better in more efficient asset classes like U.S. Large Cap stocks. Active investing aims to beat the market by selecting the specific securities you or a manager believe will outperform relative to their peers. Active funds cost 10x more on average, but tend to perform better in less efficient classes such as U.S. core bonds. Many institutional investors—Betterment included—employ a mix of both strategies. Of all the confusing ‘this or that’s’ of investing, few are more misleading than the choice between ‘active’ and ‘passive’ strategies. Passive sounds hands-off—but in practice, it’s anything but. Take our automated investing offering. While it uses a blend of both strategies, it falls more on the passive end of the spectrum. Yet on any given trading day, we’re … Scanning for tax loss harvesting opportunities by the minute Executing thousands of trades to keep customers’ portfolios humming Researching dozens of new funds, slotting in new options quarterly to improve our portfolios’ desired exposures at lower cost And every year, we refresh the asset weights of all our portfolios, making sure they align with the latest global market environment and long-term projections. Pretty lively for a passive strategy, no? So if passive investing is a bit of a misnomer, what exactly sets it apart from more "active" approaches? And which situations are each best suited for? For those helpful distinctions, let’s start with their respective mission statements. Two missions, two mindsets Both passive and active investing involve someone, sometimes a “retail” investor such as yourself, sometimes a single professional or an entire firm, making decisions on what to invest in. The key difference boils down to their objectives and related costs: With active investing, you're aiming to beat the market by selecting the specific securities you believe will outperform their peers. While the costs of actively-managed funds are trending downward, they’re still 10x more expensive on average than that of their passively-indexed peers. With passive investing, you're seeking to simply match a market’s returns. A lower bar, for sure, but also at a lower cost. The fees or “expense ratios” charged by passive funds often fall below 0.10%. Which is better? Well, beating the market is easier said than done, especially in the long run. Consider the S&P 500, for example, the most popular pick in the market for U.S. Large Cap stocks. Fewer than 15% of similar actively-managed funds have outperformed it for stretches of five years or longer. But that doesn't mean there’s no role to play for active investing, even for the long-term, risk-averse investor. Some markets aren't as accurately priced or “efficient” as the S&P. With the right expertise and right access to information, there’s relatively more value to be had in smaller markets like those in developing countries, and even more so in bond markets. The question then becomes, who’s the best at sniffing out those deals? When investing in an actively-managed fund, you’re investing in the team behind it as much as the securities themselves. Conducting due diligence on the team and their track record is critical. That’s why when using these types of ETFs in our portfolios, we use a robust quantitative and qualitative research approach to size up the teams behind them. There’s also the matter of niche markets, and whether a passive index fund is even available. One such example is the Academy Veteran Bond ETF (VETZ), one of the newest actively-managed funds we’ve brought on board. VETZ mainly invests in loans to active and retired U.S. service members and the survivors of fallen veterans, making it ideal for both active management and our Socially Responsible Investing’s Social Impact portfolio. Lastly, a lot of everyday investors simply enjoy directing some portion of their investing themselves. When we surveyed Betterment customers about their overall investing habits, ¾ of them said they mix in some self-directed investing alongside their managed portfolios. There’s nothing wrong with a little responsible fun like this. Picking your own securities—even alongside a managed portfolio—can be exciting and educational. And all that choice naturally leads to the next big difference between active and passive investing. The building blocks of a portfolio Some of the active/passive split can be seen in a given portfolio’s pieces, and how granular the investor gets. Do you want to start at the individual security level, picking single stocks and bonds yourself, or paying someone to do that for you? Or would you rather zoom out and start with funds that track a predetermined list or “index” of said securities? These can cover entire asset classes, like treasury bonds, or represent a “sub-asset” slice of a market, like short-term treasury bonds. Stock indexes are weighted by the current value of the companies within them. These market "capitalizations" ebb and flow, of course, so the makeup of indexes and the funds that track them naturally evolve over time. They're "self-cleansing" in that sense. Lower performers make up less and less of the index over time, just as higher performers become bigger slices. It's why the bulk of the S&P 500 today looks very different than it did 20 years ago. The shape-shifting S&P (top companies by market valuation) 2025 2005 1. Nvidia Corp (NVDA) 1. GE Aerospace (GE) 2. Microsoft Corp (MSFT) 2. Exxon Mobil Corp (XOM) 3. Apple Inc (AAPL) 3. Microsoft Corp (MSFT) 4. Alphabet Inc (GOOG) 4. Citigroup Inc (C) 5. Amazon.com Inc (AMZN) 5. Walmart Inc (WMT) Source: FactSet There's also the hybrid “smart beta” approach to index fund investing. Here, a fund manager starts with a preset index before actively tailoring it based on a set of quantitative investment factors. We offer one such option in the form of the Goldman Sachs Smart Beta portfolio, which invests more heavily in companies with at least one of the following factors: They’re cheap relative to their accounting value. They tend to be sustainably profitable over time. Their returns are relatively low in volatility. They’ve been trending strongly upward in price. Use the right tool for the job All of this may be a lot to take in. But we can simplify things by bringing it all back to the big picture. Active investing seeks to beat the market. It’s typically higher-cost, and comes with relatively higher risk. In specific use cases, however, an experienced team can outperform related indexes. Passive investing aims to replicate market returns at a lower cost, often over the long-term. It starts with the building block of funds instead of individual securities. As is so often the case with investing, this isn’t an either/or proposition. We use both strategies—and sometimes a blend—at Betterment, because each has a role to play in building wealth. Regardless of whose hands are guiding your investing, we give you the tools to grow your money with confidence.