Wealthfront's Smart Beta

Smart Beta is an investment feature that’s available for taxable Automated Index Investing Accounts with balances above $500,000. It’s designed to increase your expected returns by weighting the securities in your portfolio more intelligently. By optimizing the portfolio’s exposure to a collection of time-tested factors, Smart Beta aims to improve returns, while closely tracking the performance of the broad index. In addition, by combining this portfolio construction methodology with our US Direct Indexing service, we expect the incremental gains to be delivered in a tax-efficient manner.

What are investing factors?

Academic research shows that stock returns are determined by their exposure to “factors,” or common sources of risk. There have been decades of research on using factors other than market capitalization to track the performance of a collection of stocks.

Market capitalization is one such factor; most index funds weight the stocks in the funds in direct proportion to each company’s market capitalization. In other words, the larger the company, the more of the fund is invested in that company’s stock. This has been the traditional approach to tracking the index.

In addition to market capitalization, Wealthfront’s Smart Beta uses five factors - market beta, dividend yield, momentum, volatility, and profitability - to determine the weighting of stocks in your portfolio. Multi-factor models have been used by institutional investors since the 1970s and more recently were recognized by the Nobel Prize awarded in 2013. Firms like Dimensional Fund Advisors (DFA) have employed multi factor models to attract assets in excess of $500 billion.

How do I get Smart Beta?

If you have US Direct Indexing in your Automated Index Investing Account, you can enable Smart Beta on your account's "Manage" screen. Once enabled, it becomes active when your account balance approaches $500,000.

If you don’t currently have US Direct Indexing as part of your portfolio but you want it, you can add it following the instructions here.

What are the benefits of Smart Beta?

The primary benefits of our implementation of Smart Beta are:

• Tax-efficiency: By pairing it with US Direct Indexing, we’re able to minimize the impact of taxes on your excess returns.
• Multiple investment factors: While there are many investment factors that can be considered when assessing an individual security, many Smart Beta ETFs only use one factor. But our research team has analyzed the data and determined that five factors most efficiently optimize your portfolio.
• No fee: Smart Beta is available for no additional fee beyond the standard Wealthfront advisory fee of 0.25% annually.

For more details, see our Smart Beta white paper.