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Written by Cari Scribner on September 25, 2020
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How Does Betterment Invest Your Money?

Betterment is a robo-adviser offering automated and goal-inspired investments for everyday people like you and me.

Betterment lets people invest in passive index-tracking equity and fixed-income ETF portfolios. Additionally, they can open tax advantaged investment accounts like traditional and Roth IRAs.

A lot of people are curious how Betterment invests your money, since it is algorithm based.

It is not a financial advisor picking and choosing assets for you. Instead, it is a computer algorithm choosing your allocations based on the information you provide Betterment.

Here's how Betterment invests your money.

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Goal-Specific Portfolios

Betterment was created with a mission of helping people figure out and aim to reach specific goals.

You will need to keep these goals in mind as you set up your Betterment account. Perhaps it’s a dream house, a tropical vacation or money to pay for your child’s education. Whatever the goal, Betterment can help design the right portfolio for you.

Its portfolio strategy was built on Nobel-prize winning research. This was done so people will feel confident that they are following a proven, time tested investment strategy.

Betterment features ETFs in many asset classes set up to match your risk tolerance for your specific goals.

The platform will help you invest in a globally diversified portfolio of stocks and bonds, allocated to an appropriate level of risk for the timeline you set for your financial goals.

Its portfolio strategy includes stock investments in developed and emerging markets and bond investments in governments and corporations around the world.

Short answer: Betterment invests your money in low fee, broad market index funds. Rather than trying to beat the market, you are instead owning the entire market in a low fee and well diversified manner.

If you have a higher risk tolerance (younger, more aggressive) Betterment will put more of your money in stocks and less in bonds

If you have a lower risk tolerance (older, less aggressive) Betterment will put more of your money in bonds and less in stocks.

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Funds

Here are a number of the funds that are often a component of a Betterment portfolio.

U.S. Total Stock Market

This set of holdings features stocks in the U.S. market.

VTI is the primary ETF used to gain exposure to the entire U.S. stock market.

U.S. Value Stocks - Large Cap

This set of holdings is one of three that offers exposure to value stocks of certain sizes.

U.S. Large Cap stocks can be defined as those in the top 70% of the capitalization of the U.S. stock market. Value stocks are those that often trade at a lower price relative to their dividends, earnings and/or sales than the average stock.

VTV is the primary ETF used to gain value stock exposure among companies with a large capitalization.

U.S. Value Stocks - Mid Cap

U.S. Mid Cap stocks are usually companies between $1 billion and $8 billion in market capitalization in the United States.

VOE is the primary ETF used to add companies with a medium capitalization to your portfolio.

U.S. Value Stocks - Small Cap

U.S. Small Cap stocks usually grow at a faster pace than the typical company. They also 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.

Bonds/Fixed Income

The bond portion of the portfolio includes governmental, agency, and corporate bonds from around the globe.

Betterment also includes cash-like, low-risk bonds to help manage the expected risk for conservative allocations.

U.S. High Quality Bonds

These bonds originate from the U.S. investment-grade bond market. This brings stability to portfolios, while offering higher cash income than U.S. Treasury bonds alone.

They are still subject to interest rate risk. The U.S. government and high-quality U.S. corporations offer these bonds, 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.

U.S. Municipal Bonds

These are only included in taxable portfolios, since the interest from them is generally federally tax-exempt.

While municipal bond credit risk is slightly higher than risk-free U.S. Treasuries, it still remains fairly low. This works for investors who shy away from risk. This characteristic, coupled with favorable federal tax treatment, makes municipal bonds an excellent addition to taxable portfolios.

The primary ETF used to gain exposure to U.S is MUB. Municipal bonds, due to its relatively high liquidity.

U.S. Inflation-Protected Bonds

The U.S. Treasury issues these with the value of the principal indexed to inflation. This set of holdings serves to insulate a part of the portfolio from the depreciating effects of inflation. 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.

betterment UI

U.S. High-Yield Corporate Bonds

Companies with poor credit ratings offer these bonds at high-than-average interest rates.

U.S. High-Yield Corporate bonds generally offer attractive yields and opportunity for capital appreciation. However, they do carry higher risk than U.S. Investment-Grade Corporate Bonds. They also diversify the bond portion of a portfolio, resulting in higher expected risk-adjusted returns.

HYLB is the primary ETF to gain exposure to U.S. High-Yield Corporate Bonds, due to its tight bid-ask spread and low expense ratio.

U.S. Short-Term Treasury Bonds

The U.S. Treasury issues these bonds with short maturity terms between one month and one year, offering extremely low risk exposure. Generally, U.S. Short-Term Treasury Bonds a cash alternative, generating nominal benefit through interest payments. These bonds help 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.

International Developed Market Bonds

Non-US developed market governments and organizations, largely in Europe and the Pacific regions, issue these bonds. The bonds in this set of holdings have high credit quality and provide worldwide interest diversification for a bond portfolio.

This helps to decrease 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

Governments with economies that are rapidly growing and industrializing issue these dollar-denominated bonds. They offer higher expected returns than other types of bonds in the portfolio due to higher expected risk.

The primary ETF to gain exposure to International Emerging Market Bonds is EMB. This is due to its low expense ratio, tight bid-ask spread, and high level of market liquidity.

Final Thoughts

Betterment constructs investment portfolios based on Modern Portfolio Theory.

Rather than having a traditional financial advisor determine your asset allocation, they instead handle this with an algorithm. This allows Betterment to manage your money at a significantly lower cost, not to mention with no account minimums.

Based on the information you provide Betterment about your age, goals, risk tolerance etc. They will construct a portfolio of stocks and bonds.

The goal is not to beat the market, the goal is to passively invest in the entire market in a low fee manner. This is accomplished through low fee index funds from providers like Vanguard and BlackRock.

Over time, Betterment will periodically rebalance your portfolio and change your asset mix as your risk tolerance changes.

Keep Reading:

How Does Betterment Invest Your Money?
Article written by Cari Scribner
Cari Scribner is a career journalist with 20 year’s experience writing for newspapers and magazines. Now a freelance writer, she is also a published fiction writer with more than 15 short stories in literary mags. She recently completed a novel that is on the desk for consideration at two publishing houses. She lives with her two small dogs, Miloh and Lucy, in Upstate NY.

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