Betterment’s adoption of Goldman Sachs smart beta portfolios underscores the steep competition among robo-advisors. With robo-advisor algorithms becoming increasingly sophisticated and affordable, all companies in the financial services industry are looking for ways to stand out against the competition.
Betterment’s Goldman Sachs Smart Beta Portfolio proposes a new way of looking at investing that takes advantage of both passive and active investing strategies.
What is Smart Beta Strategy?
Smart Beta is a transparent, rules-based method of portfolio management that utilizes both passive and active investing strategies in an attempt to outperform the market. The goal of smart beta strategy is to obtain returns higher risk-adjusted than the overall market. The smart beta strategy invests in several factors that might be less efficient than the stock market in general. By capitalizing on market inefficiencies and investing in these factors, smart beta investing attempts to outperform the market in general.
Smart beta portfolios invest in indexes but use distinct weighting to capitalize on market inefficiencies that might lead to higher risk-adjusted returns.
Smart Beta strategy looks at performance factors of stocks and bonds— frequently including momentum, quality, size, value, and volatility— and diversifies portfolios based on these factors. Goldman Sachs Smart Beta portfolios, specifically, focus on four factors: good value, high quality, low volatility, and strong momentum.
Which Factors Drive the Betterment Goldman Sachs Smart Beta Portfolio Strategy?
Good Value— Betterment Goldman Sachs Smart Beta strategy determines value by looking for companies who demonstrate a positive net income (after tax) and have a low price. Betterment believes this will give “investors exposure to companies that have high growth potential but have been overlooked by other investors.”
High Quality— Here, Smart Beta strategies look for companies who have the potential for growth, consistent returns, and stable earnings. These companies usually have stronger fundamental factors than others on the market.
Low Volatility—Stocks with low volatility are those that don’t swing extremely in any direction. They tend to perform better than highly volatile stocks over time, which may seem counterintuitive. However, it is possible that more volatile stocks are more attractive because they offer the potential for bigger gains.
Strong Momentum— The Smart Beta strategy looks for investments that show momentum in terms of growth. This group of momentum stocks typically outperformed the market during their faster growth periods. The goal here is to ensure clients get to purchase investments that are increasing in value.
Why Invest in a Smart Beta Portfolio?
Betterment Smart Beta portfolios combine the four above factors— good value, high quality, low volatility, and strong momentum— to create a diverse mix of investments. This combination maximizes the potential for higher returns than other portfolio options on the market.
These factors have been shown to improve returns of a typical index-fund market weight investment portfolio. Although research has shown that a portfolio focused on companies that exhibit characteristics from these four factors has beaten market averages over the long-term, returns aren’t guaranteed.
The Goldman Sachs Smart Beta portfolio consists of Smart Beta ETFs that include stocks from companies screened for the four Smart Beta factors—value, high quality, strong momentum, and low volatility.
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Another benefit is that the Goldman Sachs Smart Beta Portfolio is extremely customizable, with the option to invest in 1% increments anywhere from 0% to 100% stocks. That ends up being a whopping 101 different portfolio variations and makes this investment option fully customizable based on your risk tolerance.
How is the Goldman Sachs Smart Beta Portfolio Different than Betterment’s other portfolios?
The Betterment Goldman Sachs Smart Beta Portfolio is one choice within the platform’s investment options. The smart beta choice is more actively managed than the typical goals-based diversified index fund investment approach. Betterment also has three other investment strategies that investors can choose from.
They differ from the Goldman Sachs Smart Beta portfolio in crucial ways.
The Betterment portfolio strategies are:
Goals-based investing. In this portfolio, investors create a target goal. Portfolios are then suggested by the robo-advisor algorithms based on this goal, your timeline, and your risk tolerance. This is the generic Betterment portfolio option, which is essentially passive and comes standard with automatic rebalancing. All funds within this portfolio are typical index fund.
Socially-Responsible Investing. This investment strategy is good for those who want ethical investment options. Whether you care about animals, the environment, or social justice, there are investment options for you; an SRI portfolio can help you discern which options are right for you. While your Goldman Sachs Smart Beta Portfolio may include some SRI options, the Smart Beta strategy will not actively seek out these investment opportunities.
BlackRock Target Income Portfolios. This investment strategy is geared toward conservative investors, whereas the Goldman Sachs Smart Beta Portfolio is not. The BlackRock Target Income Portfolios are bond portfolios and are designed for investors seeking cash flow. While the Betterment Smart Beta portfolio does allow for a large degree of customization, the strategy not geared toward conservative investing in the way this BlackRock income offering is.
Regardless of your investment choice, you always have access to texting with financial advisors and the option to choose financial advisory assistance as well.
Plus, all Betterment customers can access the companies high yield savings account and other cash management offerings.
What is Goldman Sachs Smart Beta Performance?
In the handy chart above, Betterment highlights past performance of Smart Beta indices vs. past performance of S&P 500. The chart illustrates annually the individual performance of all four investment factors considered by Betterment against the performance of S&P 500 and a combination of all four factors.
While the combined factors have not been in the top spot of any year, it is worthy of note that the combination of factors is consistently in the upper half of the chart. A second strong selling point is that in most years the combined equal weighting of all four factors has beaten the returns of the S&P 500 market weighted index.
Overall, the Goldman Sachs Smart Beta performance is impressive.
What are the Risks of Smart Beta investing?
Some investment professionals’ question whether Smart Beta investing over-promises in terms of performance. It’s impossible to guaranteed performance for any investment.
Further, investors should be cautious with investment strategies that strive to outperform the market. Although the gains can be great, such a strategy also runs the risk of severe losses.
Reams of investment research, including several studies by index fund powerhouse Vanguard show that in any given year, the majority of investment funds fail to outperform the market performance. And those that outperform one year, are unlikely to repeat that outperformance.
As such, the Smart Beta strategy is not for the conservative or short-term investor. Those who have a higher risk tolerance and time on their side may still benefit from such a strategy.
Betterment Goldman Sachs Smart Beta – Wrap Up
There are many benefits to investing in the Goldman Sachs Smart Beta portfolio, including:
- Well-rounded investments that focus on growth potential, value, and volatility.
- A diversified portfolio with passive and active management strategies.
- Customization of anywhere between 0-100% stocks.
Of course, no investment strategy is completely free of risk. Some cons of the Betterment Goldman Sachs Smart Beta strategy include:
- Its promises for growth are based on past performance. This is not dissimilar to other investment strategies, but it does mean that growth is not guaranteed.
- The potential for portfolio growth is countered by the potential for loss.
- Management fees are slightly higher than those of the goals based Betterment investing options.
You may still be wondering, “should I invest with the Betterment Goldman Sachs Smart Beta portfolio?”
The Smart Beta strategy is not a good fit for investors who are looking for low-risk investments or those who are on a tight timeframe. The Smart Beta strategy, like any other potentially high-return investment strategy, requires time in order to be effective. Investors should be prepared to accept some risk with their portfolio and have the time to allow the portfolio to recover in the event of a large drop in value.
For investors with both time and a higher risk tolerance, however, the Smart Beta strategy may be the ideal fit. This investment strategy takes advantage of the market in transparent ways, like seeking out undervalued stocks with high potential for growth. While such strategies can result in losses at times, Betterment’s strategy is designed to maximize portfolio growth.
Finally, investors can deploy a portion of their investable assets to a Smart Beta strategy like the Goldman Sachs Smart Beta Portfolio at Betterment with the remainder in a market-matching index fund portfolio.
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