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March 1, 2015
Review of: Betterment
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Reviewed by:
On March 1, 2015
Last modified:November 3, 2021


Betterment will build you an efficient portfolio comprised of widely diversified, low cost ETFs.

Betterment is an online investment management platform, that provides the user with professional investment management at a very low fee. The platform offers a number of services that make it one of the better investment management sites available.

You can hold both taxable investment accounts and IRA’s – including traditional, Roth and roll-over accounts – on the Betterment platform.

How Does Betterment Work?

Betterment creates a custom-designed portfolio for you that is consistent with your risk tolerance. They determine this by having you complete a brief questionnaire that determines exactly what that tolerance is.

betterment overview

Actual investments are based on Modern Portfolio Theory (MPT), which is where proper investment allocation is held to be significantly more important than the selection of individual securities and funds. The key is to make sure that the portfolio is properly diversified in the right asset classes. This will provide both a maximum rate of return while keeping risk to a minimum.

The platform works by using exchange traded funds (ETF’s) which are also index funds. Index funds are more tax efficient, since they don’t trade securities within the portfolio other than when there is a change in the underlying index. Fewer stock trades means less likelihood of incurring capital gains, and the capital gains taxes that will result.

It’s important to understand that Betterment isn’t a platform for the do-it-yourself investor. There is no provision that will allow you to choose your own stocks, or even ETF’s that will make up your portfolio. In fact, Betterment uses the same ETF’s – and there are only 13 of them – in constructing virtually every portfolio it manages.

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Once again the key to understand is that allocation is the goal, rather than individual security selection. The index ETF’s collectively represent thousands of stocks and bond issues, and provide both diversification and exposure to virtually every corner of the investment universe.

Each individual portfolio than will be allocated among those same ETF’s, based on the risk tolerance of the individual investor. So the only thing that will change from one investor to another are the percentage allocations that are held in each investment account.

Betterment is designed to be a hands-off investment platform, in which all investment management is handled by Betterment, and the individual's only responsibility is to fund and maintain his or her account position. This is the perfect platform for someone who wants to invest their money, but doesn’t want to get involved in the details of the investing.

Betterment will not only provide investment allocations, but they will also perform periodic rebalancing to make sure that your portfolio is consistent with your risk tolerance and your investment goals. Simply put, once you sign up for the platform there’s nothing that you need to do.

The Betterment Investment Portfolio

As noted above, Betterment uses the same 13 ETF’s in constructing virtually every portfolio that is managed on the platform. There are six stock-based ETF’s, and seven bond-based ETF’s. It is believed that stocks and bonds represent the primary investment vehicles, and growth and capital preservation will be determined by the specific mix between the two major asset classes.

And again, within those 13 ETF’s, you will have investment exposure to virtually every sector that you can imagine.

Below is a list of the six stock-based ETF’s that are contained in the Betterment portfolio:

  • Vanguard US Total Stock Market Index ETF (VTI)
  • Vanguard US Large-Cap Value Index ETF (VTV)
  • Vanguard US Mid-Cap Value Index ETF (VOE)
  • Vanguard US Small-Cap Value Index ETF (VBR)
  • Vanguard FTSE Developed Market Index ETF (VEA)
  • Vanguard FTSE Emerging Index ETF (VWO)

Note that the ETF mix includes not only the general stock market, but also large-, mid-, and small-cap funds, as well as international stocks in the developed market, and participation in emerging markets. Virtually the entire global stock markets are covered with these six funds.

And here is a list of seven bond funds that Betterment invests in:

  • iShares Short-Term Treasury Bond Index ETF (SHV)
  • Vanguard Short-Term Inflation Protected Treasury Bond Index ETF (VTIP)
  • Vanguard US Total Bond Market Index ETF (BND)
  • iShares National AMT-Free Muni Bond Index ETF (MUB)
  • iShares Corporate Bond Index ETF (LQD)
  • Vanguard Total International Bond Index ETF (BNDX)
  • Vanguard Emerging Markets Government Bond Index ETF (VWOB)

And once again, we have seven ETF’s covering virtually the entire global bond market. Though it is primarily based in various US bond market sectors, there are also allocations into international bonds, as well as the government bonds of emerging market countries.

This is a relatively simple concept, that enables you to participate in the complexities of the global markets without having your money spread out too thin.

Betterment – Tax Loss Harvesting

Tax loss harvesting is a service that Betterment offers on larger accounts (account balances of $50,000 or more). Tax loss harvesting is “selling a security that has experienced a loss, then buying a correlated asset (i.e. one that provides similar exposure) to replace it. The strategy has two benefits: it allows the investor to “harvest” a valuable loss, and it keeps the portfolio balanced at the desired allocation.”

betterment tax loss harvest

Betterment provides this service on taxable accounts (it has no purpose in tax sheltered accounts since there’s no potential to incur capital gains) through what it calls it’s Tax Loss Harvesting+ feature. They claim that Tax Loss Harvesting+ generates 2 times the tax benefit of other automated tax loss harvesting strategies – generating 1.94% in mean annual tax offsets compared to .95% by other automated services.

It’s all handled automatically through the platform, so there’s nothing you need to do, and no extra fees for the service.

Tax loss harvesting is a complicated subject in it’s own right, so if you’re interested in learning more about it, check out Betterment’s Tax loss harvesting White Paper on the topic.

Betterment Pricing

betterment fee structure

Betterment charges a percentage fee on the amount of money that you have under management on the platform. The fee has three pricing tiers:

Builder. This is the basic Betterment starter program, and fees are as follows:

  • 0.35% of your average annual balance
  • No minimum initial account balance, but you must commit to a $100/month minimum auto-deposit, otherwise you will be charged a flat rate of $3 per month
  • No Trade Fees
  • No Transaction Fees
  • No Rebalancing Fees

Better. This is the intermediate pricing level, and also the plan in which their tax harvesting service begins to apply:

  • 0.25% of your average annual balance
  • $10,000 minimum balance
  • No Trade Fees
  • No Transaction Fees
  • No Rebalancing Fees
  • Tax Loss Harvesting+ ($50,000 minimum balance)

Best. This is where the fees on Betterment get seriously attractive. And considering that there is only the one percentage fee, it’s even better.

  • 0.15% of your average annual balance
  • $100,000 minimum balance
  • No Trade Fees
  • No Transaction Fees
  • No Rebalancing Fees
  • Tax Loss Harvesting+
  • Personal Consultation – personal calls to one of Betterment's investment experts available seven days a week ($500,000 minimum balance required)

Will Betterment Work for You?

If you are a hands-off investor, looking for that perfect set-it-and-forget-it investment platform, then Betterment could be the perfect platform for you. The investment services are comprehensive, and the fees are extremely reasonable, particularly with a portfolio size in excess of $100,000.

Check out Betterment and see if it will work for you.

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About the author 


Tom is a former accountant turned entrepreneur. He is not a financial adviser but does tend to give a lot of financial advice to his friends and colleagues. He currently runs a small online venture and blogs about his research and experiences.

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