Betterment Review: Will Impact (SRI) Portfolios Perform? (2022 Update)

Betterment is a low-cost, feature-rich robo-advisor with three socially responsible investing (SRI) options. The Impact options are cheap and come with features like tax-loss harvesting. Besides, Betterment expects that SRI Portfolio performance will be comparable to the conventional portfolio. Keep reading to learn if you should sign up.

SustainFi   Updated March 19th, 2022

Rating: Excellent (4.5 / 5)

Pros

  • Choice of three low-cost socially responsible investing (SRI) options
  • SRI options have improved environmental, social, and governance (ESG) metrics and less energy exposure than conventional portfolios
  • Multiple features, including automatic rebalancing and tax-loss harvesting
  • Easy to use
  • Charitable giving tool
  • Human advisors are available a la carte 

Cons

  • No option to exclude fossil fuel companies
  • No direct indexing
  • Human advisors are not included

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Summary

SustainFi Rating:4.5 / 5
Account minimum• Betterment Digital: $10
• Betterment Premium: $100,000
Management fee• Betterment Digital: 0.25%
• Betterment Premium: 0.40%
Socially responsible options3 impact portfolio options (Broad Impact, Climate Impact, and Social Impact)
Investment expense ratio• Broad Impact: 0.13%-0.18%
• Climate Impact: 0.16%-0.22%
• Social Impact: 0.16%-0.20%
• Core: 0.05%-0.16%
Accounts supported• Individual and joint taxable investment accounts
• Traditional, Roth, and SEP, inherited IRAs
• Trusts
• 401k rollovers
Human advisors• Betterment Digital: none, but you can purchase financial planning packages starting at $299
• Betterment Premium: unlimited access to human advisors
Tax-loss harvestingYes
Automatic rebalancingYes
Best forSelection of impact portfolios

What is Betterment?

Founded by Jon Stein in 2008, Betterment is the first and most successful robo-advisor judging by assets under management (which reached $29 billion in early 2021). The robo-advisor uses algorithms based on Modern Portfolio Theory to create the right portfolio to meet your goals, such as saving for retirement or growing your wealth. Betterment has created multiple portfolios to suit all types of investors. They are even set to launch crypto portfolios in the near future.

Betterment account types

Betterment supports the following account types:

  • Taxable individual and joint investment accounts
  • Traditional, Roth, SEP, inherited IRAs; rollover IRAs
  • Trusts

Betterment doesn’t offer custodial (UTMA/UGMA) or 529 college savings accounts. You can get custodial accounts with Acorns.

Betterment signup process

Betterment offers a simple signup process and allows you to modify investment goals by adjusting how much you want to invest in equities vs. bonds. The site is very transparent about the funds your portfolio is invested in. The process takes about five minutes and involves answering a series of short questions.

Betterment account minimum

There is a $10 minimum for the Betterment Digital plan. The premium plan, which gives you access to fiduciary financial advisors, requires a $100,000 investment.

Betterment management fee

Betterment Digital charges the same management fee (0.25% or $25 annually on a $10,000 investment) for traditional and SRI/Impact portfolios. 0.25% is one of the lower fees among full-service robo-advisors. The premium plan costs 0.40%.

Betterment portfolio options

Betterment launched the first socially responsible investing (SRI) portfolio in 2017, expanding it to three SRI options in 2020. In addition, they offer the conventional Betterment Core Portfolio, the Goldman Sachs Smart Beta Portfolio, and the Innovative Technology option.

Betterment fund expense ratios

The funds in the Impact portfolios cost slightly more than the funds in the Core Portfolio. For example, the Broad Impact Portfolio costs 0.13%-0.18% ($13 to $18 on a $10,000 investment) versus 0.05%-0.16% for the Core Portfolio. Still, 0.13-0.18% is one of the cheapest sustainable options out there.

Betterment Cash Reserve and Checking Accounts

Betterment offers two cash management accounts:

  • Betterment Cash Reserve, a high yield savings account, is FDIC-insured and pays 0.35% APY*
  • Betterment Checking Account, a no-fee checking account that comes with a Visa debit card. The account is FDIC-insured for up to $250,000 and reimburses ATM and foreign fees. You can get cash back rewards from thousands of brands like Dunkin, adidas and Walmart

Human financial advisors

The Betterment Digital plan doesn’t come with access to human advisors, though you can buy a package for an extra fee ($299-$399 for 45-60 minutes). Human advisors are Certified Financial Planners (CFP), the most rigorous certification for financial professionals. CFPs also pledge to be fiduciaries, meaning that they promise to act in your best interest. 

Here are some of the packages:

  • Getting Started: $299
  • Retirement Planning: $399
  • Financial Check-up: $399
  • College Planning: $399
  • Marriage Planning: $399

Betterment charitable giving tool

Betterment lets you donate to charities in a tax-efficient way – by giving shares from your account. Betterment chooses the shares that have appreciated the most and have the highest long-term capital gains. You get tax receipts for your donations through the account. Donating through Betterment helps charities avoid processing fees (which add up to 5% through some platforms) and get 100% of your gift.

Betterment automatic rebalancing

Betterment will automatically adjust your holdings if the portfolio strays from the predetermined asset allocation. Nearly all robo-advisors offer this feature. 

Tax-loss harvesting

Tax-loss harvesting is a tax reduction strategy that involves selling a fund or stock that has experienced a loss. By realizing this loss, you can offset taxable gains on other investments. The sold fund is replaced with a similar one, maintaining an optimal asset allocation.

Betterment offers automatic tax-loss harvesting at no additional cost at the ETF level. A more advanced tax-loss harvesting strategy, selling individual stocks that have lost money (also called direct indexing), is not available. (If you are interested, you can check out Personal Capital.)

In addition to tax-loss harvesting, Betterment offers Tax-Coordinated Portfolios. To take advantage of that, you need to open both a taxable investment account and a retirement account with Betterment. Betterment will then hold income-earning assets like bonds in tax-advantaged retirement accounts and stocks in taxable accounts. This will ensure an optimal asset allocation while reducing taxes.

According to Betterment, this strategy can add 0.48% a year to your return, at no cost to you.

Socially Responsible Investing (SRI) Options

Betterment offers three socially responsible investing options: Broad Impact, Climate Impact, and Social Impact Portfolios. 

Broad Impact Portfolio

Most of the Broad Impact Portfolio is invested in environmental, social, and governance (ESG) funds. We found that for the 70% equity and 30% bond allocation, 72% of the assets were in ESG funds. 

Betterment’s general ESG option includes ESG funds for U.S. stocks, emerging and developed markets stocks, and, for non-taxable portfolios, U.S. high-quality bonds. Because of fees or trading limitations, the rest of the portfolio (including U.S. bonds for taxable accounts, international bonds, and emerging markets bonds) is still drawn from conventional ETFs. When tax-loss harvesting is enabled, Betterment adds conventional ETFs for emerging and developed markets stocks. 

The Broad Impact Portfolio includes the following funds:

  • U.S. stocks: iShares ESG Aware MSCI USA ETF (ESGU), iShares MSCI KLD 400 Social ETF (DSI), iShares MSCI USA ESG Select ETF (SUSA)
  • U.S. engagement stocks: Engine No. 1 Transform 500 ETF (VOTE)
  • Emerging markets stocks: iShares ESG Aware MSCI EM ETF (ESGE)
  • Developed markets stocks: iShares ESG Aware MSCI EAFE ETF (ESGD)
  • U.S. bonds: iShares ESG Aware USD Corporate Bond ETF (SUSC), iShares ESG U.S. Aggregate Bond ETF (EAGG) for retirement accounts, iShares National Muni Bond ETF (MUB) for taxable accounts
  • Conventional options for international bonds and emerging markets bonds

The portfolio relies on cheap ESG ETFs from iShares. Betterment uses large ESG ETFs from iShares (BlackRock), especially the iShares ESG Aware MSCI USA ETF (ESGU). While iShares ETFs own fossil fuel companies, they generally contain less energy than conventional alternatives. They also exclude tobacco, thermal coal, and certain weapons manufacturers. 

In July 2021, Betterment added the VOTE ETF, which will try to engage with large U.S. companies to drive change on issues like climate change.

This is what the Betterment dashboard looks like for the Broad Impact Portfolio:


Climate Impact Portfolio

The Climate Impact Portfolio emphasizes the “E” or environmental factors in ESG. This portfolio features a low-carbon footprint stock ETF (CRBN) and ETFs that divest from fossil fuel reserve owners. According to Betterment, carbon emissions per dollar of revenue for the 100% stock Climate Impact Portfolio are half of those of the conventional (Core) Portfolio. The portfolio adds green bonds – bonds that fund environmentally friendly projects – through a green bond ETF. 

The 70% equity and 30% bond portfolio has 82% of assets in ESG funds, a high allocation. To construct this portfolio, Betterment relies on the iShares MSCI ACWI Low-Carbon Target ETF (CRBN). CRBN is an ETF that seeks to include companies with a lower carbon footprint. The ETF provider measures the carbon intensity of each stock by tracking the tons of CO2 emissions per million dollars in sales. (Despite lower carbon intensity, CRBN has energy exposure, including oilfield services provider Schlumberger.)

🔔 Learn if low-carbon funds are right for you.

The remaining half of the stock exposure in the Climate Impact Portfolio is invested in fossil fuel reserve-free ETFs (SPYX for U.S. stocks, EFAX for developed markets stocks, and EEMX for emerging markets stocks). (Despite excluding oil and gas companies with reserves, SPYX includes oilfield services and fossil fuel-powered utilities.)

The Climate Impact Portfolio includes the following funds:

  • Global stocks: iShares MSCI ACWI Low-Carbon Target ETF (CRBN)
  • U.S. stocks: SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX)
  • U.S. engagement stocks: Engine No. 1 Transform 500 ETF (VOTE)
  • Emerging markets stocks: SPDR MSCI EAFE Fossil Fuel Reserves Free ETF (EFAX)
  • Developed markets stocks: SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF (EEMX)
  • U.S. high-quality and international bonds: iShares Global Green Bond ETF (BGRN)
  • Non-ESG options for other bonds

The Climate Impact Portfolio is not fossil free. Although the Climate Impact Portfolio is not free of fossil fuels, it does have better ESG scores and less exposure to energy than Betterment’s Core Portfolio, particularly for international stocks.

However, the Climate Portfolio doesn’t take into account social or governance factors (the “S” and the “G” in ESG).

This is what the Betterment dashboard looks like for the Climate Impact Portfolio:


Social Impact Portfolio

Similar to the Broad Impact Portfolio, most of the Social Impact Portfolio is invested in ESG funds. We found that for the 70% equity and 30% bond allocation, 73% of the assets were in ESG funds. 

The portfolio adds diversity and inclusion funds. The Social Impact Portfolio adds two impact funds that promote gender diversity and ethnic and racial inclusion. These funds are SPDR SSGA Gender Diversity Index ETF (SHE) and Impact Shares NAACP Minority Empowerment ETF (NACP). These two funds add up to around 8% of the portfolio invested 70% in stocks and 30% in bonds. 

  • SHE is a U.S. Stock ETF that includes companies with greater gender diversity in senior leadership. Companies are ranked according to the ratio of women in senior leadership positions; the leaders in each sector are added.
  • NACP, a U.S. stock ETF from Impact Shares, uses a scoring methodology from the National Association for the Advancement of Colored People (NAACP). The goal is to provide exposure to companies with strong diversity policies. 

The Social Impact Portfolio includes the following funds:

  • U.S. stocks: iShares ESG Aware MSCI USA ETF (ESGU), Impact Shares NAACP Minority Empowerment ETF (NACP), SPDR SSGA Gender Diversity Index ETF (SHE)
  • U.S. engagement stocks: Engine No. 1 Transform 500 ETF (VOTE)
  • Emerging markets stocks: iShares ESG Aware MSCI EM ETF (ESGE)
  • Developed markets stocks: iShares ESG Aware MSCI EAFE ETF (ESGD)
  • U.S. bonds: iShares ESG Aware U.S. Aggregate Bond ETF (EAGG), iShares National Muni Bond ETF (MUB)
  • Non-ESG options for international bonds, emerging markets bonds, and inflation-protected securities

This is what the Betterment dashboard looks like for the Social Impact Portfolio:


All three socially responsible portfolios are a material improvement over the conventional portfolio based on fossil fuel exposure and ESG ratings from MSCI and Sustainalytics.

Betterment SRI Portfolio performance

The team at Betterment has looked at industry research and done historical backtesting of the SRI (Impact) Portfolios. They believe that SRI Portfolio performance shouldn’t differ significantly from the Core (non-ESG) portfolio over the long term, though there can be some differences over shorter periods.

After including the relevant fund expense ratios and Betterment’s 0.25% management fee, the performance of the Broad Impact Portfolio was similar to that of the Core Portfolio for the four-year period ending May 2021. Data for Climate Impact and Social Impact Portfolios was more limited because some of the funds in the Portfolios were only launched in 2018.

Here is some more data for you: 

  • The Climate Impact Portfolio returned 43.3% vs. 39.4% for the Core Portfolio between November 2018 and May 2021
  • The Social Impact Portfolio returned 47.4% vs. 43.9% for the Core Portfolio between October 2018 and May 2021
  • The Broad Impact Portfolio returned 10.4% vs. 11.0% for the Core Portfolio over the four-year period ending May 2021

💰 Takeaway

  • Betterment is a low-cost and feature-rich robo-advisor with three impact investing options.
  • They also offer access to checking accounts, cash accounts, rewards, tax-loss harvesting, and financial advisors.
  • We view this as the best robo-advisor option out there if you want to invest sustainably, even though there is no option that excludes fossil fuels.

🔔 Looking to compare more options? Read our guide to socially responsible robo-advisors.

Compare:


*Annual percentage yield (variable) is as of 4/1/2022. Cash Reserve is only available to clients of Betterment LLC, which is not a bank, and cash transfers to program banks are conducted through the clients’ brokerage accounts at Betterment Securities.

NOT INVESTMENT ADVICE. The content is for informational purposes only; you should not construe any such information as investment advice.

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