Smart Beta is an investment feature, based on investing factors, that’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 can 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?
Smart Beta is available to clients with taxable account balances of at least $500,000. If you have US Direct Indexing in your account, you will automatically receive Smart Beta when 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 (formerly known as Stock-level Tax-Loss Harvesting), 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.
For more details, see our Smart Beta white paper.
This communication has been prepared solely for informational purposes only. Nothing in this communication should be construed as an offer, recommendation, or solicitation to buy or sell any security or a financial product. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Wealthfront or its affiliates endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.
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PassivePlus® is Wealthfront’s signature suite of investment features. Designed by Wealthfront’s Research Team to optimize for efficiency and deliver additional risk-adjusted returns, each strategy is based on rigorous, time-tested academic research.
When Wealthfront replaces investments with “similar” investments as part of the tax-loss harvesting strategy, it is a reference to investments that are expected, but are not guaranteed, to perform similarly and that might lower an investor’s tax bill while maintaining a similar expected risk and return on the investor’s portfolio. Wealthfront assumes no responsibility to any investor for the tax consequences of any transaction.
Tax loss harvesting may generate a higher number of trades due to attempts to capture losses. There is a chance that Wealthfront 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.
Wealthfront’s 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.
Wealthfront only monitors for tax-loss harvesting for accounts within Wealthfront. The client is responsible for monitoring their and their spouse's accounts outside of Wealthfront to ensure that transactions in the same security or a substantially similar security do not create a “wash sale.” A wash sale is the sale at a loss and purchase of the same security or substantially similar security within 30 days of each other. If a wash sale transaction occurs, the IRS may disallow or defer the loss for current tax reporting purposes. More specifically, the wash sale period for any sale at a loss consists of 61 calendar days: the day of the sale, the 30 days before the sale, and the 30 days after the sale. The wash sale rule postpones losses on a sale, if replacement shares are bought around the same time.
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 and type of investments (e.g., taxable or nontaxable) or holding period (e.g., short- term or long-term). Except as set forth below, Wealthfront will monitor only a client’s (or client’s spouse’s) Wealthfront accounts to determine if there are unrealized losses for purposes of determining whether to harvest such losses. Transactions outside of Wealthfront accounts may affect whether a loss is successfully harvested and, if so, whether that loss is usable by the client in the most efficient manner.
A client may also request that Wealthfront monitor the client’s spouse’s accounts or their IRA accounts at Wealthfront to avoid the wash sale disallowance rule. A client may request spousal monitoring online or by calling Wealthfront at 844-995-8437. If Wealthfront is monitoring multiple accounts to avoid the wash sale disallowance rule, the first taxable account to trade a security will block the other account(s) from trading in that same security for 30 days.