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Funds and Investments

Understanding Our Socially Responsible Investing (SRI) Portfolio

Socially responsible investing (SRI) is an approach to investing that reduces exposure to companies that are deemed to have a negative social impact while increasing exposure to companies that are deemed to have a positive social impact.

Articles by Betterment Editors

By the Editorial Staff
Betterment Resource Center  |  Published: September 1, 2018


Table of Contents

Getting Started

Portfolio

Other Questions


How do I enable an SRI portfolio?

You can enable the SRI portfolio when adding a new goal or updating your existing goal’s portfolio strategy.

To update an existing goal, select it to the left of your Profile and then click “Portfolio Analysis.” Select “Edit” underneath Portfolio Strategy and follow the prompts.

Is there a balance minimum for the SRI portfolio option?

No.

What will this new portfolio cost me in fund level fees?

The expense ratio for the Betterment SRI portfolio will be between 0.14% and 0.22%, depending on the relative allocation to stocks and bonds within the portfolio. For more information please review our white paper.

Can I go back to the Betterment portfolio once I opt into SRI?

Yes. Once on your Portfolio tab, select your SRI goal, you will see an option that reads “edit” under Portfolio Strategy. Simply click on the “edit” option to move your portfolio out of SRI and back into Betterment’s. You can only make one change to your election in a single day.

What’s different?

We’ve replaced our total U.S. stock market exposure (a single ticker) with three tickers, one representing SRI large-cap, one for conventional mid-cap, and one for conventional small-cap. These refer to U.S. mid-cap and small-cap growth funds. They were added so as we could maintain our value/small-cap tilts.

These changes have led to a 42% improvement to social responsibility scores on U.S. large-cap stocks (compared to the core portfolio) while remaining diversified and controlling cost.

All other SRI portfolio asset classes mirror Betterment’s portfolio because an acceptable alternative doesn’t yet exist or because the respective fund’s fees or liquidity limitations make for a prohibitively high cost.

Where can I see exactly what I’m invested in?

You can see exactly which companies you are invested in by selecting a specific goal from the left of your Profile and then “Holdings.” Click on any of the holding names to expand the view. Selecting the hyperlink will take you directly to the fund’s prospectus page which will list all companies the fund tracks.

What funds (ETFs) are in the Betterment SRI portfolio strategy?

Betterment’s portfolio strategy for socially responsible investing is based on the Betterment Portfolio Strategy, but it is modified to increase overall social responsibility. Explore the assets used in the Betterment SRI Portfolio Strategy and which funds are currently represented.

The exact funds (and weights of each asset) depend on your target allocation.

Stocks

U.S. Socially Responsible Stocks – Large Cap

This set of holdings screens for U.S. companies that have positive environmental, social and governance characteristics (as identified by the index the underlying ETF tracks). It’s also one of five funds in the Betterment SRI portfolio strategy that offer exposure to U.S. stocks of certain sizes. Size is one of two factor tilts of Betterment’s portfolio optimization, which aims to drive higher expected returns. Exposure to stocks with positive environmental, social, and governance attributes enables investors to express their views toward social and economic causes in the large cap space.

DSI is the primary ETF used to gain exposure to stocks with positive environmental, social, and governance characteristics with a large capitalization. The secondary ETF for Betterment SRI, SUSA, has slightly lower liquidity comparatively, and is used to enable Tax Loss Harvesting+™.

U.S. Growth Stocks – Mid Cap

This set of holdings offers exposure to mid-cap growth stocks, and when combined with U.S. Value Stocks – Mid Cap, provides exposure to all middle-sized U.S. companies. This class of growth stocks helps to avoid over-weighting a portfolio’s value tilt while contributing to a portfolio’s size tilt. U.S. mid cap stocks are typically defined as those companies with between $1 billion and $8 billion in market capitalization in the United States.

VOT is the primary ETF used to gain growth stock exposure among companies with a medium capitalization. Our secondary ETFs, IVOG and IWP, are highly correlated with VOT. VOT is the primary recommendation since it has the lower expense ratio and tightest bid-ask spread. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™.

U.S. Growth Stocks – Small Cap

This set of holdings offers exposure to small-cap growth stocks, and when combined with U.S. Value Stocks – Small Cap, provides exposure to all small-sized U.S. companies. This class of growth stocks helps to avoid over-weighting a portfolio’s value tilt while also contributing to a portfolio’s size tilt. U.S. small cap stocks are typically defined as those companies with below $1 billion in market capitalization in the United States.

VBK is the primary ETF used to gain growth stock exposure among companies with a small capitalization. Our secondary ETFs, IWO and VIOG, are highly correlated with VBK. VBK is the primary recommendation since it has the lowest expense ratio and tightest bid-ask spread. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™.

U.S. Value Stocks – Mid Cap

This set of holdings is one of three that allocates exposure to value stocks of certain sizes. Size and value are two factor tilts of Betterment’s portfolio optimization, which aims to drive higher expected returns. While stocks of good value and appropriate size exist in other geographic markets, Betterment expresses these portfolio tilts only in the U.S. to maintain low costs. U.S. Mid Cap stocks are typically defined as those companies with between $1 billion and $8 billion in market capitalization in the United States. Value stocks are those that trade at a lower price relative to their dividends, earnings and/or sales than the average stock.

VOE is the primary ETF used to gain value stock exposure among companies with a medium capitalization. Our secondary ETFs, IWS and IJJ, are highly correlated with VOE. VOE is the primary recommendation since it has the lowest expense ratio and tightest bid-ask spread. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™.

U.S. Value Stocks – Small Cap

This set of holdings is one of three that allocates exposure to value stocks of certain sizes. Size and value are two factor tilts of Betterment’s portfolio optimization that aims to drive higher expected returns. While stocks of good value and appropriate size exist in other geographic markets, Betterment expresses these portfolio tilts only in the U.S. to maintain low costs. U.S. Small Cap stocks typically grow at a faster pace than the typical company, and tend to represent an often-volatile segment of the market.  Value stocks are those that trade at a lower price relative to their dividends, earnings and/or sales than the average stock.

VBR is the primary ETF used to gain value stock exposure among companies with a small capitalization. Our secondary ETFs, IWN and IJS are highly correlated with VBR. VBR is the primary recommendation since it has the lowest expense ratio. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™.

International Developed Market Stocks

This set of holdings offers exposure to a broad collection of stocks from non-U.S. developed markets such as the United Kingdom, the European Union, Japan, and others. Generally, developed market stocks have a similar risk and return profile as the U.S. Total Stock Market. Greater portfolio diversification can be achieved with allocations to emerging market stocks and bonds in addition to international developed market stocks.

VEA is the primary ETF used to gain exposure to international developed market stocks. Our secondary ETFs, SCHF and IEFA, are highly correlated with VEA. VOE is the primary recommendation since it has the lowest expense ratio and tightest bid-ask spread. The secondary ETFs enable Tax Loss Harvesting+™.

International Emerging Market Stocks

This set of holdings offers exposure to a broad collection of stocks from emerging markets, such as China, Taiwan, India, Brazil, Russia, Thailand, and South Africa, among others. International Emerging Market Stocks generally involve higher expected risk compared to Developed Market Stocks, but may lead to higher growth as developing states modernize and gain wealth. Emerging market stocks are less correlated with U.S. Stocks and other developed market stocks, which makes them an important part of a diversified portfolio.

VWO is the primary ETF used to gain exposure to stocks in international emerging markets. Our secondary ETFs, IEMG and SCHE, are highly correlated with VWO. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™.

Bonds

U.S. High Quality Bonds

U.S. High Quality Bonds provide exposure to the U.S. investment-grade bond market, bringing stability to portfolios, while offering higher cash income than U.S. Treasury bonds alone. The underlying bonds in this set of holdings have been rated no lower than BBB- by Standard and Poor’s, or Baa3 by Moody’s, minimizing credit risk. U.S. High Quality Bonds are still subject to interest rate risk. These bonds are offered by the U.S. government and high-quality U.S. corporations, and also could be comprised of mortgage-backed securities. The average bond maturity of the underlying bonds in this individual asset class is 8 years.

AGG is the primary ETF used to gain exposure to U.S. High Quality bonds, due to its low bid-ask spread. Our secondary ETF, BND, is similar to AGG but has a slightly higher bid-ask spread. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™ and Tax Coordination™.

U.S. Municipal Bonds

U.S. Municipal Bonds are only included in taxable portfolios, since the interest from them is generally federally tax-exempt. The underlying bonds are issued by state and regional governments to finance capital expenditures, such as infrastructure spending. While municipal bond credit risk is slightly higher than risk-free U.S. Treasuries, it still remains very low, which is attractive for risk-averse investors. This characteristic, coupled with favorable federal tax treatment, makes municipal bonds an excellent addition to taxable portfolios.

MUB is the primary ETF used to gain exposure to U.S. Municipal bonds, due to its relatively high liquidity. Our secondary ETF, TFI, is similar to MUB but has a slightly higher bid-ask spread. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™ and Tax Coordination™.

U.S. Inflation-Protected Bonds

U.S. Inflation Protected Bonds are issued by the U.S. Treasury with the value of the principal (but not interest payments) indexed to inflation. This set of holdings serves to insulate a part of the portfolio from the depreciating effects of inflation, while also offering historically low correlation with other types of bonds, helping to achieve greater diversification. Additional diversification in a bond portfolio adds a layer of protection during market downturns.

VTIP is the selected ETF used to gain exposure to U.S. Inflation-Protected Bonds due to its competitive bid-ask spread, low expense ratio, and robust asset base.

International Developed Market Bonds

International Bonds are issued by non-US developed market governments and organizations, largely in Europe and the Pacific regions. The bonds in this set of holdings have high credit quality and provide worldwide interest diversification for a bond portfolio, which helps to mitigate risk. These bonds are issued by a variety of countries and corporations to finance various spending needs, and the likelihood of default by these issuers is relatively low.

The selected ETF for International Developed Market Bonds is BNDX, due to its competitive expense ratio.

International Emerging Market Bonds

International Emerging Markets Bonds are dollar-denominated bonds issued by governments with economies that are rapidly growing and industrializing. This component offers higher expected returns than other types of bonds in the portfolio due to higher expected risk. Their unusually low correlation with other bonds results in higher risk-adjusted expected performance for the bond portion of a portfolio.

EMB is the primary ETF used to gain exposure to International Emerging Market Bonds, due to its low expense ratio, tight bid-ask spread, and high level of market liquidity. Our secondary ETFs, VWOB and PCY, are similar to EMB. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™.

U.S. Investment-Grade Corporate Bonds

U.S. Corporate Bonds are issued by corporations to finance business activities. U.S. Investment-Grade Corporate Bonds generally offer much more attractive yields and opportunities for capital appreciation to compensate investors for default risk. They also diversify the bond portion of a portfolio, resulting in higher risk-adjusted expected returns. The underlying bonds in this set of holdings have been rated no lower than BBB- by Standard and Poor’s, or Baa3 by Moody’s, minimizing credit risk. U.S. Investment-Grade Corporate Bonds are still subject to interest rate risk.

LQD is the primary ETF used to gain exposure to U.S. Investment-Grade Corporate Bonds, due to is tight bid-ask spread and stronger asset base. Our secondary ETFs, VCIT and ITR, are similar to LQD. Betterment’s use of secondary ETFs enables Tax Loss Harvesting+™ and Tax Coordination™.

U.S. Short-Term Treasury Bonds

U.S. Short-Term Treasury Bonds are issued by the U.S. Treasury with short maturity terms between one month and one year, offering extremely low risk exposure. Generally, U.S. Short-Term Treasury Bonds are considered a cash alternative, generating nominal benefit through interest payments. At lower stock allocations, these bonds help to decrease the risk of an overall portfolio.

The selected ETF for U.S. Short-Term Treasury Bonds is SHV, due to its competitive expense ratio.

When will this be full SRI?

In the future, we will improve our SRI portfolio even further, iterating and adding new SRI funds that satisfy our cost and diversification requirements as they become available.

Why isn’t the SRI portfolio more sustainable?

We wanted a portfolio that was well diversified and cost controlled while still having a value/small cap tilt focus. Currently the SRI space doesn’t have enough available options yet for funds with sufficient liquidity. As SRI options become more prevalent, and therefore more available to us, we will work to make the portfolio even more sustainable over time.

How do these new tickers impact the advice I will receive from the Betterment app?

The Betterment SRI has its own set of projections and advice based on capital market assumptions. Outputs such as the projection graph and recommended deposits will reflect your new portfolio.

Will the performance of my SRI portfolio deviate from my Betterment portfolio?

At a given stock allocation level, SRI and Betterment portfolios are highly correlated based on historical data. For example, at 70% stocks, these portfolios have a 99.8% correlation. We expect the performance of an SRI portfolio to closely track that of a Betterment portfolio at a given stock allocation level.  However, an SRI portfolio will have a slightly higher fund fee than a corresponding Betterment portfolio. You can read more about this in our white paper.

Can I use Betterment SRI as the portfolio strategy for a goal using Tax Coordination?

Goals using Tax-Coordination (also known as a Tax Coordinated Portfolio™) cannot automatically utilize Betterment SRI as the portfolio strategy. If you wish to update an existing Tax Coordinated goal to SRI, please contact support@betterment.com.

If you are in this situation, you can still open a new goal using Betterment SRI, but that new goal cannot utilize Tax Coordination.

You may not see the option to change a goal portfolio strategy to Betterment SRI if you have state-specific muni bonds. Contact us at support@betterment.com for assistance.

If I have TLH+ enabled, how long will I be in the tertiary position?

Our optimizer strongly prefers to shed tertiaries from the portfolio when there is no wash sale impact. This does not guarantee that it will be removed, but our optimization algorithms are strongly guided to avoid tertiary exposure.

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