{"id":14919,"date":"2022-01-18T09:01:08","date_gmt":"2022-01-18T17:01:08","guid":{"rendered":"https:\/\/canary.kcprod.info/blog\/?p=14919"},"modified":"2025-01-29T12:57:38","modified_gmt":"2025-01-29T20:57:38","slug":"updates-to-smart-beta","status":"publish","type":"post","link":"https:\/\/canary.kcprod.info/blog\/updates-to-smart-beta\/","title":{"rendered":"We\u2019re Updating Our Smart Beta Offering"},"content":{"rendered":"\n<p>Today, we\u2019re excited to announce three updates to Wealthfront\u2019s Smart Beta service. These updates are designed to improve your expected risk-adjusted returns, remove some unnecessary complexity for accounts over $1 million, and reduce tracking error.<\/p>\n\n\n\n<p><a href=\"https:\/\/support.wealthfront.com\/hc\/en-us\/articles\/115002707243-Wealthfront-s-Smart-Beta\">Smart Beta<\/a> is an advanced version of Wealthfront\u2019s <a href=\"https:\/\/support.wealthfront.com\/hc\/en-us\/articles\/211005023-Wealthfront-s-US-Direct-Indexing-\">US Direct Indexing<\/a> that applies time-tested research to optimize your allocation to specific stocks and further improve your returns without increasing risk. If your portfolio contains US Direct Indexing, Smart Beta automatically becomes active when your account balance approaches $500,000.\u00a0<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What\u2019s changing?<\/h2>\n\n\n\n<p>Here\u2019s a detailed look at the three updates we\u2019re making to our Smart Beta offering.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">We\u2019re updating our Smart Beta factors<\/h3>\n\n\n\n<p>Smart Beta uses what are known as <a href=\"https:\/\/support.wealthfront.com\/hc\/en-us\/articles\/115002997906-What-is-a-factor-and-how-did-you-choose-the-factors-for-the-Smart-Beta-portfolio-\">investment \u201cfactors\u201d<\/a> to weight your holdings of US stocks more intelligently once your account balance reaches $500,000. Every so often, based on intensive research, we believe it makes sense to update the factors we use.&nbsp;<\/p>\n\n\n\n<p>We\u2019ll no longer use the \u201cvalue\u201d factor in our service, as research suggests it is no longer as effective as it once was. Value is measured using a company\u2019s book equity to market value ratio, which doesn\u2019t account for a company\u2019s investment in intangible assets like research and development, brand value, and patents \u2014 all of which are becoming increasingly important in today\u2019s economy. Instead, we\u2019ll now use \u201cprofitability\u201d as a factor when optimizing your allocation to specific stocks, which means companies with strong operating profitability will get relatively more weight in your portfolio. Research indicates that the profitability factor has better risk and return characteristics than the underlying index, and it offers diversification because it\u2019s relatively uncorrelated to the other factors we use. We expect this change should improve your risk-adjusted returns.&nbsp;<\/p>\n\n\n\n<p>We\u2019ll continue using the other investment factors we\u2019ve historically used in our implementation of Smart Beta: beta, dividend yield, momentum, and volatility.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">We\u2019re simplifying Smart Beta<\/h3>\n\n\n\n<p>Historically, we\u2019ve offered two versions of Smart Beta:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Smart Beta with 500 individual stocks for accounts of $500,000 to $1 million<\/li>\n\n\n\n<li>Smart Beta with 1,000 individual stocks for accounts of more than $1 million<\/li>\n<\/ul>\n\n\n\n<p>These tiers were based on the dollar amounts required to hold a reasonable collection of individual US stocks while continuing to track the performance of the broad US market. One way we measure their success is with \u201cannual harvesting yield.\u201d This is the quantity of losses harvested in a year divided by the value of the portfolio at the beginning of that period. We believed the version with 1,000 stocks would have a significantly better harvesting yield than the version with 500 stocks. However, this wasn\u2019t the case.&nbsp;<\/p>\n\n\n\n<p>The table below shows annualized returns for both tiers of Smart Beta, as well as annual harvesting yield in a backtest from 2000-2021. We use backtest data to measure harvesting yield because harvesting yield is impacted by deposit and withdrawal behavior \u2014 so comparing realized harvesting yield between the two tiers isn\u2019t an apples-to-apples comparison.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1256\" height=\"530\" src=\"https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2022\/01\/SmartBetaChart_V3-2x-1256x530.jpg\" alt=\"\" class=\"wp-image-15518\" srcset=\"https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2022\/01\/SmartBetaChart_V3-2x-1256x530.jpg 1256w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2022\/01\/SmartBetaChart_V3-2x-640x270.jpg 640w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2022\/01\/SmartBetaChart_V3-2x-768x324.jpg 768w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2022\/01\/SmartBetaChart_V3-2x-1536x648.jpg 1536w, https:\/\/canary.kcprod.info/blog\/wp-content\/uploads\/2022\/01\/SmartBetaChart_V3-2x.jpg 1997w\" sizes=\"auto, (max-width: 1256px) 100vw, 1256px\" \/><figcaption class=\"wp-element-caption\">Source: Wealthfront <sup>1<\/sup><\/figcaption><\/figure>\n\n\n\n<p>As a result, we\u2019ve decided we will no longer offer the version of Smart Beta with 1,000 individual stocks because it offers no meaningful benefit compared to the version with 500 stocks. It was also making our product unnecessarily complicated.<\/p>\n\n\n\n<p>Instead, all Smart Beta accounts of $500,000 or more will now hold approximately 600 individual stocks. If you currently have Smart Beta in an account of $1 million or more, we won\u2019t sell any positions that are at a gain, and we\u2019ll use new deposits to move you closer to your new target allocation. There should be no meaningful impact on your long-term returns or your taxes.<\/p>\n\n\n\n<p>These changes will make the product simpler for us to manage. But more importantly, they will also make it easier to understand and eliminate unnecessary complexity for clients. We believe this streamlined approach will lead to broader adoption <meta charset=\"utf-8\">\u2014 and as a <a href=\"https:\/\/www.investopedia.com\/terms\/f\/fiduciary.asp\">fiduciary<\/a>, we think this is in our clients\u2019 best interest.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>We\u2019re focusing on a slightly larger number of individual stocks<\/strong><\/h3>\n\n\n\n<p>As we explained above, we\u2019ll now focus on a slightly larger number of individual stocks <meta charset=\"utf-8\">\u2014 roughly 600 instead of 500 <meta charset=\"utf-8\">\u2014 in our implementation of Smart Beta. Accounts with Smart Beta will still hold what\u2019s known as a completion index ETF to ensure you get exposure to the broad US stock market, but we will switch from using the Vanguard Extended Market ETF (<a href=\"https:\/\/finance.yahoo.com\/quote\/VXF?ltr=1\">VXF<\/a>) to Vanguard\u2019s Small-Cap ETF (<a href=\"https:\/\/finance.yahoo.com\/quote\/VB\/\">VB<\/a>). Together, these shifts will reduce your portfolio\u2019s tracking error from the <a href=\"https:\/\/www.crsp.org\/products\/investment-products\/crsp-us-total-market-index\">CRSP US Total Market Index<\/a> (on which the Vanguard Total Stock Market Index Fund ETF (<a href=\"https:\/\/www.wealthfront.com\/explore\/vti\">VTI<\/a>) is based).<\/p>\n\n\n\n<p><a href=\"https:\/\/www.investopedia.com\/terms\/t\/trackingerror.asp\">Tracking error<\/a> measures how closely your holdings track the underlying investment. In the case of Smart Beta, we measure tracking error to the Vanguard Total Stock Market Index Fund ETF (<a href=\"https:\/\/www.wealthfront.com\/explore\/vti\">VTI<\/a>), the ETF used to represent the US stocks asset class in Wealthfront Classic portfolios. Put more simply, a portfolio with low tracking error is a more accurate portfolio.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Grow your long-term wealth<\/h2>\n\n\n\n<p>You don\u2019t need to take any action to benefit from these updates <meta charset=\"utf-8\">\u2014 our software will handle it automatically. There should be no meaningful impact on your tax bill and there will be no impact on the fees you pay to Wealthfront.&nbsp;<\/p>\n\n\n\n<p>We\u2019re excited to make these updates to Smart Beta and you can count on us to keep making our products better over time.&nbsp; For a more detailed discussion of how our Smart Beta works, we encourage you to check out our <a href=\"https:\/\/research.wealthfront.com\/whitepapers\/smart-beta\/\">Smart Beta white paper<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Today, we\u2019re excited to announce three updates to Wealthfront\u2019s Smart Beta service. These updates are designed to improve your expected risk-adjusted returns, remove some unnecessary complexity for accounts over $1 million, and reduce tracking error. Smart Beta is an advanced version of Wealthfront\u2019s US Direct Indexing that applies time-tested research to optimize your allocation to [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":15519,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1360],"tags":[1397],"coauthors":[523],"class_list":["post-14919","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-product-news","tag-smart-beta"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v24.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>We\u2019re Updating Our Smart Beta Offering | Wealthfront<\/title>\n<meta name=\"description\" content=\"We\u2019re making three updates to our Smart Beta offering. 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