Betterment Bond Portfolio Asset Allocation Changes 2013

Online investment manager recently announced an upcoming change to their portfolio asset allocation, specifically their bond portion. Here’s a visual example of the ETF changes:

(click to enlarge)

I have mixed feelings about this change…

This is a fundamental shift in philosophy and it smells like performance chasing. The original allocation of 100% Treasury bonds (50% Nominal, 50% Inflation-Linked) likely came from David Swensen, as he is the Yale Endowment manager that supported the idea that you should own only the highest-quality bonds and take your risk on the stock side where your interests are aligned with the corporations. (With bonds, corporations and governments are trying to look as safe as possible even if they aren’t. This way, they pay lower interest rates.)

Now, suddenly they want to shift to a “broad global exposure” type of portfolio with lower credit quality and higher risk. Why now? Why was 100% US fine for 3 years but no longer? Perhaps because Treasuries and TIPS in general haven’t been doing that great recently? Perhaps because Emerging Markets bonds have had very high returns during that same period?

Still, it is following general industry movements. Vanguard has also added international bonds to their lineup of Target Retirement Funds. Many more international bond funds are available from many other providers. It appears that the costs for investing in international developed and emerging market bonds have dropped low enough that they can be indexed efficiently. I’m personally not convinced it is necessary and don’t own any international bonds myself, but I can understand the diversification argument.

It’s a move towards more complexity and asset-class overlap. Total US Bond already has corporate bonds, so why add more? It is to increase yield since Treasuries are yielding so little?

More tax messiness. I have an account, and I know that Betterment already makes a ton of little tax lots if you hold it in a taxable account. Thank goodness it imports directly into TurboTax software, but I’d get tired of holding a brand-new portfolio every other year. They just changed their stock allocation significantly in 2011.

Cash? Meh. They make a big deal about adding cash (technically T-Bills and other Treasuries maturing in less than a year), but really it doesn’t seem like much of anything. They state that cash will only be included in portfolios with less than 42 percent stock allocation and only recommended for goals with a time horizon of five years or less. I wouldn’t use Betterment for any goals within 5 years in the first place.

Current Bond ETF Breakdown

  • 50% iShares Barclays TIPS Bond ETF (TIP)
  • 50% iShares Lehman 1-3 Year Treasury Bond ETF (SHY)

Future Bond ETF Breakdown (variable %)

  • “Cash” iShares Short 0-1 Year Treasury Bond ETF (SHV)
  • Vanguard Short-Term Inflation-Protected Bond ETF (VTIP)
  • iShares Core Total US Bond ETF (AGG)
  • iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
  • Vanguard Total International Bond ETF (BNDX)
  • Vanguard Emerging Markets Bond ETF (VWOB)

I logged into my account (I opened previously with $1,000 to try it out) but the new portfolio changes haven’t been implemented yet. It appears that it won’t be a fixed breakdown between the ETFs, but instead the percentage will vary depending on the stock/bond ratio. Once the percentages are provided and implemented, I will update my Betterment Review page. Betterment is still offering $25 sign-up bonus if you make an initial deposit of $250 within 60 days of sign-up and do not withdraw that initial deposit for 60 days.


  1. Hello,

    Appreciate your blog and the knowledge share.

    Would you please elaborate : “I wouldn’t use Betterment for any goals within 5 years in the first place.”?



  2. Jonathan, thanks for this update. This sudden shift makes me glad I continue to manage my own portfolio and drive my own asset allocation strategy.

  3. @Manish – If you really need a certain amount of money 5 years, I wouldn’t invest in stocks at all. 5 years is really nothing in stocks. Sometimes 20 years is barely enough. Check out the chart in this post:

    For a 5-year period, I’d just go and find the best 5-year CD and call it a day. Right not they yield more than Treasuries anyhow. You could do bond ETFs but they are bond ladders and will continue to have a certain amount of risk throughout the entire period.

  4. It looks like marketing to me. A fundamental issue when you look at them is if they are just going to invest in 3-4 funds, why bother paying them 15 basis points (or whatever their fee is) to rebalance once in a while. But if you take something simple like a bond allocation and blow it into six categories to be balanced, now you have some serious mumbo-jumbo going on now and their fee is justified. That is my cynical take.

  5. I just opened an account with Betterment because I am interested in saving and investing. I funded it with 50.00 and will most likely add 50.00 weekly.

    My question is do they set up an automatic investing plan for you?

  6. Yes, Betterment offers automatic investing through scheduled bank withdrawals.

  7. Hello,
    I really enjoy how you recommend paying off debt, having an emergency fund, and focus on longer term investing. “Sometimes 20 years is barely enough,” really rang true with me. Enjoy your posts and all the great info!

    JJ Hollis

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