Another limitation is cost and liquidity concerns. Expense ratios can seriously hinder client returns over the long-term, which is why Betterment aims to keep costs low. But low expense ratio ETFs often lack the liquidity needed to feature in Betterment SRI portfolios.
Compare Betterment SRI Portfolio vs Betterment Core Portfolio
The main change between Betterment core and SRI portfolios (taxable and tax-deferred, such as traditional IRAs) is the composition of large cap holdings.
In SRI portfolios, Betterment allocates to a U.S. ESG exchange-traded fund, DSI, which is the ticker symbol for the iShares MSCI KLD 400 Social Index Fund ETF, and secondarily to KLD for tax-loss harvesting.
These ETFs track a benchmark that includes companies that score highly against ESG benchmarks and excludes companies involved in activities, such as:
- Nuclear power
- Adult entertainment
- Military weapons
- Civilian firearms
An example of a Betterment SRI portfolio for an IRA account is shown below:
Do Betterment SRI Portfolios Score Highly?
To evaluate how well a portfolio scores on socially responsible investment criteria, the MSCI Quality Score Scale quantifies ESG criteria:
Scale 0-10 Score
8-10 Very high ESG quality — underlying holdings largely rank best in class globally based on their exposure to and management of key ESG risks and opportunities
6-8 High ESG quality — underlying holdings largely rank above average globally based on their exposure to and management of key ESG risks and opportunities
4-6 Average ESG quality — underlying holdings rank near the global peer average, or ESG quality of underlying holdings is mixed
2-4 Low ESG quality — underlying holdings largely rank below average globally based on their exposure to and management of key risks and opportunities
0-2 Very low ESG quality — underlying holdings largely rank worst in class globally based on their exposure to and management of key ESG risks and opportunities
>> More: Compare Betterment Vs Acorns
What Are The Risks Choosing A Betterment SRI Portfolio?
Betterment has conducted historical back-testing showing that SRI portfolios have tracked core portfolios with a correlation of 0.9979, so while past history cannot be used to predict future returns, the quantitative studies may provide investors some comfort.
Factoring in expense ratios had no significant change either on total net returns of core portfolios vs SRI portfolios.
70 percent stock allocation portfolios for 10 year period
However, dividends may be lower by selecting a Betterment SRI portfolio vs a Betterment core portfolio. Although future dividends are random variables, past results show that income returns from Betterment SRI portfolios have been lower than core portfolios.
Summary: Betterment SRI Portfolios
Betterment SRI portfolios are a way for you to better align your social and environmental preferences, as well as your values overall with your investments.
Although limitations with respect to liquidity and fee schedules of funds remain, you can still build a globally diversified SRI portfolio that rivals a core portfolio on costs and performance returns – with the caveat that dividends may be lower.
The more clients who choose SRI portfolios the greater the demand for socially responsible investments and the more likely it is over time that costs will come down and liquidity concerns will fall to the wayside.
This article was republished with permission from Investor Mint.