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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 will automatically receive Smart Beta if your account balance reaches $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.
The effectiveness of the tax-loss harvesting strategy to reduce the tax liability of the client will depend on the client’s entire tax and investment profile, including purchases and dispositions in a client’s (or client’s spouse’s) accounts outside of Wealthfront Advisers and type of investments (e.g., taxable or nontaxable) or holding period (e.g., short-term or long-term).
Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and the strategy could introduce portfolio tracking error into your account. Tracking error is a measure of financial performance that determines the difference between the return fluctuations of an investment portfolio and the return fluctuations of a chosen benchmark. There may also be unintended tax implications.
Wealthfront Advisers’ investment strategies, including portfolio rebalancing and tax loss harvesting, can lead to high levels of trading. High levels of trading could result in (a) bid-ask spread expense; (b) trade executions that may occur at prices beyond the bid ask spread (if quantity demanded exceeds quantity available at the bid or ask); (c) trading that may adversely move prices, such that subsequent transactions occur at worse prices; (d) trading that may disqualify some dividends from qualified dividend treatment; (e) unfulfilled orders or portfolio drift, in the event that markets are disorderly or trading halts altogether; and (f) unforeseen trading errors. The performance of the new securities purchased through the tax-loss harvesting service may be better or worse than the performance of the securities that are sold for tax-loss harvesting purposes.
Tax loss harvesting may generate a higher number of trades due to attempts to capture losses. There is a chance that trading attributed to tax loss harvesting may create capital gains and wash sales and could be subject to higher transaction costs and market impacts. In addition, tax loss harvesting strategies may produce losses, which may not be offset by sufficient gains in the account and may be limited to a $3,000 deduction against income. The utilization of losses harvested through the strategy will depend upon the recognition of capital gains in the same or a future tax period, and in addition may be subject to limitations under applicable tax laws, e.g., if there are insufficient realized gains in the tax period, the use of harvested losses may be limited to a $3,000 deduction against income and distributions. Losses harvested through the strategy that are not utilized in the tax period when recognized (e.g., because of insufficient capital gains and/or significant capital loss carryforwards), generally may be carried forward to offset future capital gains, if any.
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. Please see our Full Disclosure for important details.
Investment management and advisory services are provided by Wealthfront Advisers LLC (“Wealthfront Advisers”), an SEC-registered investment adviser, and brokerage related products, including the Cash Account, are provided by Wealthfront Brokerage LLC, a Member of FINRA/SIPC. Wealthfront, Wealthfront Advisers and Wealthfront Brokerage are wholly owned subsidiaries of Wealthfront Corporation.
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