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 Portfolio Strategy?
- Why Invest in a Smart Beta Portfolio?
- What is Goldman Sachs Smart Beta Performance?
- What are the Risks of Smart Beta investing?
- Betterment Goldman Sachs Smart Beta – Wrap Up
What is Smart Beta Portfolio Strategy?
Smart Beta is a transparent, rules-based method of portfolio management that uses both passive and active investing strategies in an attempt to outperform the market or reduce volatility. The goal of a smart beta portfolio is to obtain higher risk-adjusted returns, sometimes called alpha, than the overall market. The smart beta strategy capitalizes on market inefficiencies that reward certain types of stocks.
The Betterment Smart Beta strategy looks at performance factors of stocks and bonds and diversifies portfolios based on these factors:
- Good value.
- Strong momentum.
- High quality.
- Low volatility.
By choosing a smart beta strategy as all or part of your Betterment portfolio, you’re striving to beat the typical index fund passive investment stratgy. Smart beta strategies aren’t just some guy or gals opinion. There are decades of investment research that has shown that over long periods of time, stocks with lower valuations, strong growth, and continuing momentum tend to outperform.
Smart beta portfolios invest in index funds, but use distinct weightings and factors to capitalize on market inefficiencies which might lead to higher risk-adjusted returns.
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 passively managed index fund portfolio options on the market.
Research has shown that a portfolio focused on companies that exhibit characteristics from these four factors has beaten market averages over the long-term, although future 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.
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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 1% to 100% stocks. That ends up being a whopping 100 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. These choices differ from the Goldman Sachs Smart Beta portfolio in crucial ways.
The Betterment portfolio strategies are:
Goals-based investing. With this choice, investors create a target goal. Portfolios are then suggested by the robo-advisor algorithms based on the 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 funds.
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. While your Goldman Sachs Smart Beta Portfolio may include some SRI companies, the Smart Beta strategy will not actively seek out companies that meet socially responsible investment qualities.
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 comprised of bond index funds and are designed for investors seeking cash flow. While the Betterment Smart Beta portfolio does allow for a large degree of customization, the strategy is 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 company’s 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 the annual 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 to 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 beat the returns of the S&P 500 market weighted index.
Notice that we haven’t given you annualized Betterment smart beta performance numbers because those will depend on you personal mix of stock and bond investments. We also believe that it is unwise to choose investments based upon returns. Depending on popularity, market conditions, and other factors, certain investment styles go in and out of favor.
Overall, the Goldman Sachs Smart Beta strategy is based upon long term returns of outperforming investment styles. So, this investment style has a possibility of outperforming the typical index fund investment approach.
What are the Risks of Smart Beta investing?
Some investment professionals question whether Smart Beta investing over-promises in terms of performance. After all, 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, all investment approaches run the risk of perodic 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.
Smart Beta is a catchy name for a specific investment strategy which strives for higher returns and/or lower volatility than the overall stock market. The volatility of the stock market has a beta of one. If a stock is more volatile than the stock market, then it’s beta will be greater than 1 and vice cersa. When smart beta strategies outperform typical passive index fund investing, you might just call them “smart”.
Factor investing is broad category of investing that includes many types of strategies. Smart beta investing focuses on weighting certain types of companies, with similar characteristics or factors in an attempt to beat the returns of the overall stock market. Smart beta is one type of factor investing, but the terms are frequently used interchangeably.
The easiest way is to invest in smart beta funds. These types of funds focus on a variety of distinct investment characteristics. If you prefer to create your own smart beta portfolio, you could use a stock screener and screen for the factors that you prefer such as – high dividends, low p/e ratio, or low volatility stocks.
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 low-volatility.
- A diversified portfolio with passive and active management strategies.
- Customization of anywhere between 1% to 100% stock allocation.
Of course, no investment strategy is completely risk-free. Some cons of the Betterment Goldman Sachs Smart Beta strategy include:
- Its promises for growth are based on past performance. This risk is similar to other investment strategy projections and means that growth is not guaranteed.
- Management fees of the smart beta etfs are slightly higher than those 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, income portfolios, 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 decline 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 future ruturns aren’t guaranteeed, Betterment’s Golman Sachs smart beta 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. Or you might choose both the smart beta and core portfolios in your Betterment account.
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