Socially Responsible Investing (SRI) FAQ
Learn more about how you can invest in a way that reduces exposure to companies that are deemed to have a negative social and climate impact.
TABLE OF CONTENTS
About Socially Responsible Investing (SRI)
Our SRI Portfolios
How It Works
- How do the SRI strategies differ from the Betterment Core Portfolio Strategy?
- What will these new portfolios cost me in fund level fees?
- How do I enable an SRI portfolio?
- Can I go back to the Betterment portfolio once I opt into SRI?
- Where can I see a full list of what I’m invested in?
Performance and Advice
- Will the performance of my SRI portfolio deviate from my Betterment portfolio?
- How do these new tickers impact the advice I will receive from the Betterment robo-advisor?
- Can I use Betterment SRI as the portfolio strategy for a goal using TLH+ and/or Tax Coordination?
- If I have TLH+ enabled, how long will I be in the tertiary position?
What is SRI?
Socially Responsible Investing portfolios are designed to help you express your values and social ideals through your investments. Despite the various limitations that SRI portfolios face today, Betterment wants to support its customers in meeting their desires for more socially responsible vehicles for investing.
Our approach to SRI has two fundamental dimensions:
- Reducing exposure to companies involved in non-socially responsible activities and environmental, social, or governmental controversies.
- Increasing investments in companies that work to address solutions for core environmental and social challenges in measurable ways.
We chose to define our SRI approach using a set of industry criteria known as ESG, which stands for Environmental, Social and Governance. Betterment uses ESG factor scores from MSCI, an industry-leading provider of financial data and ESG analytics. To learn more about how we built our SRI portfolios, review our SRI article.
Broad Impact Portfolio
The Broad Impact SRI portfolio focuses on ETFs that rate highly on a scale that considers all three environmental, social and governance (ESG) pillars. It seeks to give investors greater exposure to all of the different dimensions of social responsibility, such as lower carbon emissions, ethical labor management, or greater board diversity. When compared to Betterment’s Core portfolio, we replace the Core portfolio’s market-capitalization based funds with SRI alternatives in four asset classes: U.S. Stocks, Emerging Market Stocks, Developed Market Stocks, and U.S. High Quality Bonds.
Additionally, stocks of companies deemed to have strong social responsibility practices (such as Microsoft, Google, Procter & Gamble, Merck, CocaCola, Intel, Cisco, Disney, and IBM) may make up a larger portion of the SRI portfolio than they do for Betterment’s Core portfolio. To learn more about the portfolio construction of the Broad Impact portfolio, review our full SRI portfolio methodology.
The Climate Impact SRI portfolio is focused on being climate-conscious rather than focusing on all ESG dimensions equally, designed to give investors exposure to climate-conscious investments without sacrificing proper diversification and balanced cost.
By investing in the Climate Impact portfolio, investors are actively divesting assets away from holders of fossil fuel reserves while cutting their investments’ carbon emissions. Carbon emissions per dollar of revenue in the 100% stock Climate Impact portfolio are half of those in the 100% stock Betterment Core portfolio, based on weighted average carbon intensity data from MSCI.
Additionally, the Climate Impact portfolio replaces our International Developed Bond and US High Quality Bond exposure by investing in a global green bond ETF. Green bonds, as defined per MSCI, fund projects that support alternative energy, energy efficiency, pollution prevention and control, sustainable water, green building, and climate adaptation. To learn more about the portfolio construction of the Climate Impact portfolio, review our full SRI portfolio methodology.
The Social Impact SRI portfolio is similar to our Broad Impact SRI portfolio, but further promotes the social pillar of ESG investing by allocating to two stock ETFs which specifically focus on diversity and inclusion: Impact Shares NAACP Minority Empowerment ETF (NACP) and SPDR SSGA Gender Diversity Index ETF (SHE).
By investing in NACP, investors are allocating more of their money to companies with a better track record of social equity as defined by the NAACP while maintaining market-like risk and strong diversification.
SHE is a US Stock ETF that allows investors to invest in more female-led companies compared to the broader market. 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. To learn more about the portfolio construction of the Social Impact portfolio, review our full SRI portfolio methodology.
When will Betterment offer full SRI portfolios?
We are now able to provide you with multiple globally-diversified SRI portfolios, at relatively low cost, that are expected to track the performance of the long-standing Betterment Core portfolio closely. However, 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 have SRI mandates, particularly in bond asset classes. Betterment may add additional socially responsible funds to the SRI portfolios and replace other ETFs as more socially responsible products become available.
We released our first SRI offering in 2017, with the stated intent to incrementally improve it over time, and we’ve done just that. You can think of these iterations as the latest, and certainly not the last step in that journey. By indicating what matters to you, as an investor, you are sending a signal to the financial services industry, which we will amplify, by bundling it with those of our other customers. As demand grows, and assets flow into funds that best reflect your values, those funds will become bigger, cheaper, and more liquid, continuing to erase whatever accessibility gaps remain between purely market-cap based index funds, and those that track a values-based index. As a result, the SRI portfolio you opt for today will only keep getting better at expressing your values.
How do the SRI strategies differ from the Betterment Core Portfolio Strategy?
Betterment Broad Impact vs Betterment Core
When compared to Betterment’s Core portfolio, there are three main changes:
- US stock exposure is replaced with a broad US ESG stock market ETF (ESGU). Two other broad US ESG stock market ETFs (DSI and SUSA) serve as the alternative tickers for ESGU for Tax-Loss Harvesting+ (TLH+).
- Emerging Market and Developed Market stock exposure are replaced with a broad ESG Emerging Market fund (ESGE) and a broad ESG Developed Market fund (ESGD), respectively. Because of limited liquidity among other Emerging Market and Developed Market SRI funds, non-ESG market-capitalization based funds are used as alternative tickers for TLH+.
- For tax-deferred portfolios only, we replace our current US High Quality Bond exposure with an ESG US High Quality Bond fund (EAGG).
To maintain our requirements for geographic and asset class diversification, lower cost, and higher liquidity, this portfolio contains some funds that do not have SRI mandates. To learn more about the comparison of the Broad Impact and Betterment Core portfolios, review our full SRI portfolio methodology.
Betterment Climate Impact vs Betterment Core
When compared to Betterment’s Core portfolio, there are three main changes:
- 50% of our Total Stock exposure is replaced with an allocation to a broad global low-carbon stock ETF (CRBN). Currently, there are no viable alternative tickers for this asset class, so this component of the portfolio cannot be tax-loss harvested.
- The remaining 50% of our Total Stock exposure is allocated to three broad region-specific stock ETFs which screen out companies that hold fossil-fuel reserves: US Total Stock Market exposure is replaced by SPYX, International Developed Stock Market exposure is replaced by EFAX, and Emerging Markets Stock Market exposure is replaced by EEMX.
- US High Quality Bond and International Developed Market Bond exposures are replaced with a global green bond ETF (BGRN).
For diversification purposes, some bond ETFs in the Betterment Climate Impact strategy are still non-climate focused, either because the corresponding alternatives do not exist or they lack sufficient liquidity. To learn more about the comparison of the Climate Impact and Betterment Core portfolios, review our full SRI portfolio methodology.
Betterment Social Impact vs Betterment Core
The Social Impact portfolio builds off of the ESG exposure from funds used in the Broad Impact portfolio and makes the following additional changes:
- We replace 10% of our US Total Stock Market exposure with an allocation to NACP.
- We replace an additional 10% of our US Total Stock Market exposure with an allocation to SHE.
Currently, there are not any viable alternative tickers for NACP or SHE, so these components of the portfolio cannot be tax-loss harvested. To learn more about the comparison of the Social Impact and Betterment Core portfolios, review our full SRI portfolio methodology.
What will these new portfolios cost me in fund level fees?
As of October 14, 2020, the Betterment Core portfolio strategy has an expense ratio range of approximately 0.05% to 0.16% on average, when the weighting of the portfolio is taken into consideration.
In comparison, the expense ratios for the Betterment SRI portfolios will be in the following ranges, depending on the relative allocation to stocks and bonds within the portfolio:
- Broad Impact: 0.13% – 0.18%
- Climate Impact: 0.16% – 0.22%
- Social Impact: 0.16% – 0.20%
Sources: Xignite and Betterment calculations as of October 14, 2020.
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, log in from a web browser and select your goal from the homepage. Go to the “Holdings” tab, then select “Edit” underneath Portfolio Strategy and follow the prompts.
There is no minimum balance to use any of our SRI strategies.
If you are already invested in Betterment’s SRI portfolio strategy and choose not to upgrade to any of these options, you will remain invested in our legacy SRI portfolio, which does not have any of the improvements mentioned under the “Broad Impact” portfolio. See our disclosures for more details.
Can I go back to the Betterment portfolio once I opt into SRI?
Yes. To edit your portfolio strategy, log in from a web browser and select your SRI goal. Go to the Holdings tab, then select “edit” under Portfolio Strategy. Please note you can only make one change to your portfolio strategy per day.
Where can I see a full list of what I’m invested in?
You can see exactly which holdings you are invested in by logging in from a web browser, selecting a specific goal from your home page, then going to the “Holdings” tab. Click on any of the asset classes to learn more. Selecting the hyperlink will take you directly to the fund’s prospectus page which will list all companies the fund tracks.
Will the performance of my SRI portfolio deviate from my Betterment portfolio?
When some first consider ESG investing, they assume that they must pay a heavy premium in order to have their investments aligned with their values. However, industry research, our historical backtesting, and our forward looking returns analysis all show that we should not expect the performance of SRI portfolios to significantly deviate from the Core portfolio over the long term, although there can be return differences over shorter periods.
Past performance does not guarantee future results. Nonetheless, our analysis of historical returns is consistent with our assertion that the performance of SRI portfolios should track the performance of the Core portfolios very closely. After reducing returns both by weighted expense ratios and a 0.25% annual Betterment fee, the performance of the Broad Impact portfolio ended up being similar to that of Core portfolio for the consecutive four year period ending on August 31, 2020, with the Broad Impact portfolio outperforming over this specific period, with a +9.18% annualized return compared to +7.76% for the core portfolio.
We have conducted similar backtests for the Climate and Social Impact portfolios, but key ETFs in these portfolios were first issued in 2018, so backtests on historical returns are limited.
When comparing IRA portfolios with a 70% stock allocation since valid pricing data became available for these ETFs, we show that the returns of the portfolios are not only directionally aligned, but also that the Social and Climate Impact portfolios have outperformed the Betterment Core portfolio over a shorter time horizon.
- The Climate Impact portfolio had a cumulative return of +22.3%, vs +15.9% for Betterment Core during the period from November 28, 2018 to September 16, 2020.
- The Social Impact portfolio had a cumulative return of +25.4%, vs +19.6% for Betterment Core during the period from October 25, 2018 to September 16, 2020.
In our forward-looking analysis for each of our three SRI portfolios, the expected net total returns for the SRI portfolios are only slightly below those of the Betterment Core portfolio. This is largely due to the higher weighted expense ratios of the SRI portfolios versus the Betterment Core Portfolio Strategy.
You can read more about our historical backtests and forward looking returns analysis in the full SRI portfolio methodology.
Disclosure relevant to all returns calculations above: The Betterment portfolios historical performance numbers are based on a backtest of the ETFs or indices tracked by each asset class in Betterment’s portfolios as of October 2020. Though we have made an effort to closely match performance results shown to that of the Betterment Portfolio over time, these results are entirely the product of a model. Actual client experience could have varied materially. Performance figures assume dividends are reinvested and daily portfolio rebalancing at market closing prices. The returns are net of a 0.25% annual management fee and fund level expenses. Backtested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower. Backtested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable. See additional disclosure https://www.betterment.com/returns-calculation/. Source: Price data from Xignite. Calculations by Betterment.
How do these new tickers impact the advice I will receive from the Betterment robo-advisor?
The Betterment SRI portfolios have their 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 selection, and you will be able to view them the same way as our other portfolio strategies via the Betterment app and website.
Can I use Betterment SRI as the portfolio strategy for a goal using TLH+ and/or Tax Coordination?
Yes. To learn more about the impact of the SRI portfolio strategies on certain product features, including TLH+ and Tax Coordination, please review our SRI disclosures.
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. To learn more about TLH+, please review our TLH+ white paper and TLH+ disclosures.
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