Socially Responsible Investing Portfolios Disclosure

Betterment offers three Socially Responsible Investing (“SRI”) portfolios: a SRI Broad Impact portfolio that considers environmental, social, and corporate governance (“ESG”) factors, as well as a Climate Impact portfolio and Social Impact portfolio (collectively, “SRI portfolios”). The following disclosures address items generally applicable to all SRI portfolios, including legacy versions of the SRI portfolios, and then discuss the features and risks particular to each of the Broad Impact portfolio, Climate Impact portfolio, and Social Impact portfolio. For additional detail on the construction of Betterment’s SRI portfolios, see our SRI methodology.

A. General Construction and Risks of SRI Portfolios

i. Betterment's Construction of SRI Portfolios

Betterment’s approach to constructing its SRI portfolios has three fundamental dimensions:

1. Reducing exposure to companies involved in unsustainable activities and environmental, social, or governmental controversies.
2. Increasing investments in companies that work to address solutions for core environmental and social challenges in measurable ways.
3. Allocating to investments that use shareholder engagement tools, such as shareholder proposals and proxy voting, to incentivize socially responsible corporate behavior.

Betterment does not directly select companies to include in, or exclude from, the SRI portfolios. Rather, Betterment identifies funds that have been classified as ESG or similar by third parties and considers internally developed “SRI mandates” alongside other qualitative and quantitative factors to select ETFs to include in its SRI portfolios (“socially responsible ETFs”). Betterment’s SRI mandates seek to express objectives within the broader domain of sustainable investing to provide the intended exposures of the SRI portfolios. Betterment maps specific mandates to each portfolio, depending on their relevance to the particular portfolio. For more details on the mandates, see “Using SRI Mandates” in our SRI methodology.

Socially responsible ETFs also include engagement-based socially responsible ETFs, which express an SRI preference through the fund manager’s direct interaction with companies held through the fund via shareholder proposals and proxy voting. Engagement-based SRI strategies may change over time, as certain shareholder engagement tools may prove more successful than others. The success of any particular proposal or proxy vote is not guaranteed, and if the fund manager’s engagement strategy proves unsuccessful, underlying companies may not adopt more socially responsible behaviors. Engagement-based socially responsible ETFs track an index, which Betterment uses to determine which asset classes the ETF gives exposure to. Betterment does not screen underlying holdings.

Details regarding the selection of the companies included in or excluded from the socially responsible ETFs in which the SRI portfolios invest can be found in the prospectuses drafted by the managers of those ETFs. Links to those prospectuses are available in the Holdings tab of your account.

ii. Generally Applicable Risks

There are several risks that are different from the risks associated with investing in Betterment’s standard portfolio (the “Core portfolio”) that investors should consider when deciding whether they wish to elect one of Betterment’s SRI portfolios.

The socially responsible ETFs in Betterment’s SRI portfolios are less diversified than comparable broad market ETFs because these investments may exclude certain companies and industries. In addition, the relative weightings of companies and sectors in the socially responsible ETFs may differ from the relative weighting of companies and sectors in comparable broad market ETFs. This means that Betterment’s SRI portfolios may be more or less volatile than the Core portfolio, or other broad market indices. 

The socially responsible ETFs in Betterment’s SRI portfolios are typically less liquid than ETFs that track comparable asset classes. This means that it is generally more difficult to buy and sell a socially responsible ETF without affecting its price, relative to a comparable broad market ETF. As a result, there may be increased trading costs to enter or exit positions in the socially responsible ETFs in which the SRI portfolios invest relative to comparable broad market ETFs. This also may result in wider discrepancies between the market price of the ETF and the price of its underlying basket of stocks than for comparable broad market ETFs, particularly during times of market stress.

Betterment’s SRI portfolios may not include socially responsible bond ETFs for all bond asset classes in the SRI portfolios. Generally as your portfolio allocation shifts to higher bond allocations, the percentage of your portfolio attributable to socially responsible ETFs decreases because there are fewer socially responsible ETFs with bond exposure available for investment. Non-socially responsible bonds are incorporated into the portfolio because the corresponding socially responsible alternatives do not exist or may lack sufficient liquidity. These non-SRI bond funds provide geographic and asset class diversification and meet our requirements for lower cost and high liquidity options. Additionally, engagement-based socially responsible ETFs may track an index that does not take into account a company’s ESG factors when weighting different companies. Engagement-based socially responsible ETFs use shareholder engagement tools to focus on improving companies’ social and environmental impact, regardless of whether the underlying company is considered ESG or not.

Investors in Betterment’s SRI portfolios may incur additional fund costs compared to investors in Betterment’s Core portfolio because the socially responsible ETFs in Betterment’s SRI portfolios generally have higher expense ratios than the expense ratios for comparable broad market ETFs in Betterment’s Core portfolio. The specific fees for each ETF in the SRI portfolios are listed in the ETF’s prospectus, which is available through the Holdings tab in your account. Because these increased fees are typically associated with a stock allocation in Betterment’s SRI portfolios, a higher stock allocation in an SRI portfolio generally will result in higher fund costs relative to an investor with the same stock allocation invested in Betterment’s Core portfolio.

Because social responsibility criteria exclude securities of certain issuers for non-financial reasons, investors may forgo some market opportunities available to those who do not use these criteria.

B. Broad Impact Portfolio

Betterment offers a broad impact (“Broad Impact”) portfolio for investors that want to focus on all three dimensions of social responsibility (environmental, social, corporate governance). The Broad Impact portfolio invests assets in socially responsible ETFs to obtain exposures to ESG and shareholder engagement mandates. Socially responsible ETFs provide exposure to, among other asset classes, U.S. and international SRI stocks, U.S. SRI bonds, as well as an allocation for an engagement-based SRI stock ETF. If applicable, the remainder of the Broad Impact portfolio may consist of broad market ETFs that do not currently align with an ESG or shareholder engagement mandate (the “other ETFs”).

Investors considering investing in the Betterment Broad Impact portfolio should be aware of the differences from the Core portfolio and unique risks, as described below. Betterment’s Broad Impact portfolio differs from the Betterment Core portfolio by substituting parts of the stock allocation and a portion of US bonds with exposure to the stocks and bonds that meet certain standards with respect to the ESG mandate. The Broad Impact portfolio includes an engagement-based socially responsible ETF that provides U.S. large capitalization exposure. 

Other ETFs provide exposure to asset classes for which socially responsible ETFs satisfying Betterment’s ESG mandate are currently unavailable. Shareholder Engagement-based socially responsible ETFs may provide exposure to companies not screened for ESG criteria. Socially responsible ETFs may include companies that do not meet the criteria of certain ESG categories. Betterment’s Broad Impact portfolio therefore reduces, but does not fully eliminate, exposure to companies that investors interested in socially responsible investing may consider to be undesirable. Betterment may add additional socially responsible ETFs to the Broad Impact portfolio as more become available and may otherwise change the composition of the SRI portfolio in a variety of ways, including but not limited to, altering the socially responsible ETFs in which the Broad Impact portfolio invests or the allocation to such ETFs and mandates.

Investors considering Betterment’s Broad Impact portfolio should understand how it impacts the operation of Betterment’s Tax Loss Harvesting+ (“TLH”) feature. Betterment does use socially responsible ETFs for the secondary and tertiary tickers in the U.S. SRI companies asset class, but does not use socially responsible ETFs for the secondary and tertiary tickers in the developed and emerging market stock asset classes because of a lack of suitable alternatives that meet Betterment’s investment criteria. If you elect the Broad Impact portfolio, enable TLH, and Betterment harvests losses in the developed and emerging market asset classes, it may reduce the portion of your portfolio held in socially responsible ETFs. The engagement-based socially responsible ETF is not eligible for TLH due to lack of suitable secondary and tertiary tickers in this asset class that meets Betterment’s investment criteria. Additionally, electing the Broad Impact portfolio for one or more goals in your account while simultaneously electing a different portfolio for other goals in your account may reduce opportunities for TLH to harvest losses. See Betterment’s TLH disclosures for further detail.

With respect to rebalancing, investing portfolios require a portfolio minimum balance in order for a rebalancing transaction to occur (which can be the aggregate of balances in a tax-coordinated portfolio); see Betterment’s portfolio minimum disclosures for further details. If your SRI portfolio balance exceeds the required minimum, Betterment will perform automatic rebalancing to correct drifts in allocations, aligning back to the target weights.

C. Climate Impact Portfolio

Betterment offers a climate impact (“Climate Impact”) portfolio for investors who want to invest in an SRI strategy more focused on the environmental pillar of “ESG” rather than focusing on all ESG dimensions equally. Betterment’s Climate Impact portfolio invests assets in socially responsible ETFs to obtain exposure to the following mandates that seek to achieve divestment and engagement: ESG, carbon footprint reduction, fossil fuel divestment, shareholder engagement, and green financing mandates. Socially responsible ETFs provide exposure to certain global green stock ETFs, certain fossil fuel reserve free ETFs that divest from companies with fossil fuel reserves internationally and in the U.S., and certain global green bond ETFs (collectively, “climate conscious ETFs”). The Climate Impact portfolio also includes an allocation for an engagement-based socially responsible ETF. For more information about the portfolio construction of the Climate Impact portfolio, please see our SRI methodology.

Investors considering investing in the Climate Impact portfolio should be aware of the differences from the Broad Impact portfolio and the Climate Impact portfolio’s unique risks, as described below. The relative weights of ETFs in the Climate Impact portfolio for a given allocation of stocks and bonds differ from that of Betterment’s Broad Impact portfolio and Core portfolio. Currently, the global green stock ETF asset class and global green bond ETF asset class are not eligible for TLH due to lack of suitable secondary and tertiary tickers in these asset classes that meet Betterment’s investment criteria. With respect to TLH in the Climate Impact portfolio, (1) fossil fuel reserve free ETFs are the only climate conscious ETFs in the Climate Impact portfolio that are eligible for TLH, (2) the ETFs used as the secondary tickers for fossil fuel reserve free ETFs are broad socially responsible ETFs that lack a particular focus on climate consciousness, and (3) the ETFs used as the tertiary tickers for fossil fuel reserve free ETFs are either broad socially responsible ETFs or other ETFs. The engagement-based socially responsible ETF is not eligible for TLH due to lack of suitable secondary and tertiary tickers in this asset class that meets Betterment’s investment criteria. The remainder of the socially responsible ETFs and other ETFs present in the Climate portfolio have the TLH limitations as described in Section B above. Lastly, because the global green stock and bond asset class ETFs comprise global securities, Betterment’s asset location service, tax coordinated portfolios (“TCP”), may be less effective relative to the Betterment Broad Impact portfolio or Betterment Core portfolio. Climate conscious ETFs may be less liquid than the socially responsible ETFs used in Betterment’s Broad Impact portfolio, meaning it may be more difficult to buy and sell climate conscious ETFs in the Climate Impact portfolio without affecting their prices, relative to other socially responsible ETFs.

Investors in the Climate Impact portfolio will incur additional fund costs compared to investors in Betterment’s Broad Impact portfolio and Core portfolio because the climate conscious ETFs in the Climate Impact portfolio have higher aggregate expense ratios than the funds used in Betterment’s Broad Impact portfolio and Core portfolio. The specific fees for each fund in the Climate Impact portfolio are listed in the funds’ prospectuses, which are available through the Holdings tab in your account.

For a description of the additional risks inherent in Betterment’s SRI portfolios, including the Climate Impact portfolio, relative to Betterment’s Core portfolio, please review the risks described in Section A. above.

D. Social Impact Portfolio

Betterment offers a social impact (“Social Impact”) portfolio for investors that want to invest in a strategy more focused on the social pillar of ESG investing (the S in ESG). Betterment’s Social Impact portfolio invests assets in socially responsible ETFs to obtain exposures to the following mandates: ESG, gender equity, racial equity, and shareholder engagement mandates. Socially responsible ETFs provide exposure to a gender diverse U.S. stock ETF asset class and a minority empowerment U.S. stock ETF asset class (collectively, “social impact ETFs”). The remainder of the Social Impact portfolio consists of the socially responsible ETFs and other ETFs that make up Betterment’s Broad Impact portfolio, as described in Section B. above, including an allocation for an engagement-based socially responsible ETF. For more information about the portfolio construction of the Social Impact portfolio, please see our SRI methodology.

Investors considering investing in the Social Impact portfolio should be aware of the differences from the Broad Impact portfolio and the Social Impact portfolio’s unique risks, as described below. The relative weights of ETFs in the Social Impact portfolio for a given allocation of stocks and bonds differ from that of Betterment’s Broad Impact portfolio. Social impact ETFs are not eligible for TLH due to lack of suitable secondary and tertiary tickers in these asset classes that meet Betterment’s investment selection criteria. Similarly, the engagement-based socially responsible ETF is not eligible for TLH due to lack of suitable secondary and tertiary tickers in this asset class that meets Betterment’s investment criteria. The remainder of the socially responsible ETFs and other ETFs present in both the Social Impact portfolio and Broad Impact portfolio have the TLH limitations as described in Section B above. Social impact ETFs may be less liquid than the socially responsible ETFs used in Betterment’s Broad Impact portfolio, meaning it may be more difficult to buy and sell social impact ETFs in the Social Impact portfolio without affecting their prices, relative to other socially responsible ETFs.

Investors in the Social Impact portfolio will incur additional fund costs compared to investors in Betterment’s Broad Impact portfolio and Core portfolio because the social impact ETFs in the Social Impact portfolio have higher aggregate expense ratios than the funds used in Betterment’s Broad Impact portfolio and Core portfolio. Because only a portion of the Social Impact portfolio is invested in social impact ETFs and the remainder of the portfolio consists of the socially responsible ETFs and other ETFs that comprise the Betterment Broad Impact portfolio, the additional fund costs relative to the Broad Impact portfolio are muted. The specific fees for each fund in the Social Impact portfolio are listed in the funds’ prospectuses, which are available through the Holdings tab in your account.

For a description of the additional risks inherent in Betterment’s SRI portfolios, including the Social Impact portfolio, relative to Betterment’s Core portfolio, please see the risks described in Section A. above.