Goldman Sachs Tax-Smart Bonds Portfolio Strategy Disclosure

The Goldman Sachs Tax-Smart Bonds portfolio strategy ("Tax-Smart Bonds portfolio") is a portfolio strategy constructed entirely of bond exchange-traded funds (“bond ETFs”).

1. Allocation of Responsibilities

Each service provider mentioned is solely responsible for the information provided on its services and fees, and for performance of its services. Information provided by Betterment is not verified by Goldman Sachs. Inclusion of Goldman Sachs' or GSAM's name or logo on Betterment's website, advertisements, or any other communications does not indicate that the information contained therein is provided or approved by Goldman Sachs.

Betterment, not Goldman Sachs, is responsible for its advisory relationships with clients. Betterment, and not Goldman Sachs, has sole responsibility for providing individualized investment advice and portfolio management services to clients. Betterment, not Goldman Sachs, is responsible for monitoring wash sales and any other potential loss disallowance as a result of disposition of a security in the portfolio. Neither Betterment nor Goldman Sachs provides legal, tax or accounting advice. Clients should obtain independent tax advice based on their particular situation.

The Tax-Smart Bonds portfolio strategy is composed of combinations of short-term bond ETFs containing treasury, municipal, and corporate bonds. 

• ETFs are subject to risks similar to those of stocks. ETF returns may fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed, or sold, may be worth more or less than their original cost. ETFs may yield investment results that, before expenses, generally correspond to the price and yield of a particular index. There is no assurance that the price and yield performance of the index can be fully matched. 
• Municipal securities are subject to credit/default risk and interest rate risk and may be more sensitive to adverse economic, business, political, environmental, or other developments if it invests a substantial portion of its assets in the bonds of similar projects or in particular types of municipal securities. While interest earned on municipal securities is generally not subject to federal tax, any interest earned on taxable municipal securities is fully taxable at the federal level and may be subject to tax at the state level.
• Investment in fixed income securities, i.e. corporate bonds and treasury bonds, are subject to the risks associated with debt securities generally, including credit, liquidity, interest rate, prepayment and extension risk. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price.  The value of securities with variable and floating interest rates are generally less sensitive to interest rate changes than securities with fixed interest rates. Variable and floating rate securities may decline in value if interest rates do not move as expected. Conversely, variable and floating rate securities will not generally rise in value if market interest rates decline. Credit risk is the risk that an issuer will default on payments of interest and principal. Credit risk is higher when investing in high yield bonds, also known as junk bonds. Prepayment risk is the risk that the issuer of a security may pay off principal more quickly than originally anticipated. Extension risk is the risk that the issuer of a security may pay off principal more slowly than originally anticipated. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Goldman Sachs built the portfolio with a mix of short-term bond ETFs containing treasury, municipal, and corporate bonds, which seek to offer lower risk than stock investing. Betterment uses the information that you provide about your tax situation, including your state of residency, federal tax bracket, tax filing status, and household income, to personalize the portfolio for you. 

Betterment uses your self-reported household income and state of residence to infer your state tax bracket. If your financial situation changes, you must inform Betterment (by updating your financial profile) in order to have your Tax-Smart Bonds portfolio reflect changes in your financial situation. Finally, the portfolio strategy considers market conditions and taxable equivalent yields monthly. When you let Betterment know that your tax situation has changed and as interest rates shift, Betterment will rebalance your personalized portfolio on or about that monthly cadence. Although Betterment will endeavor to implement changes to the Tax-Smart Bonds portfolio as soon as possible after they are communicated by Goldman Sachs, Betterment retains discretion on whether and when to implement any such changes.

Betterment, and not Goldman Sachs, has sole responsibility for providing individualized investment advice and portfolio management services to Clients and for implementing their discretion in respect of the Smart-Tax Bond portfolios. Betterment, not Goldman Sachs, is acting as fiduciary to each Client. 

Because Goldman Sachs sets the fund fees (expense ratio) for Goldman Sachs bond ETFs recommended for the Tax-Smart Bonds portfolio, Goldman Sachs has a financial incentive to recommend its own funds for inclusion in the portfolio, even if those funds have higher costs than comparable ETFs offered by other fund managers. Investors in the Tax-Smart Bonds portfolio may forgo the opportunity to invest in bond ETFs offered by other fund managers, some of which may have lower expense ratios or more attractive yield/risk profiles than the bond ETFs selected for inclusion in the Tax-Smart Bonds portfolio. Additional detail regarding the ETFs included in the Tax-Smart Bonds portfolio can be found in the prospectuses drafted by the managers of those funds. Copies of those prospectuses are available in the portfolio tab of your Betterment account.

3. Disclosures Relative to Betterment’s Core Portfolio

There are several ways that the Tax-Smart Bonds portfolio differs from Betterment’s Core portfolio strategy (the “Core portfolio”). Investors should consider these differences when deciding whether they wish to elect the Tax-Smart Bonds portfolio.

The Tax-Smart Bonds portfolio is less diversified than Betterment’s Core portfolio because it does not provide an investor with any exposure to stocks. A diversified portfolio containing both stock and bond ETFs may increase the risk-adjusted return relative to an all bond ETF portfolio because stock and bond prices do not always move together.

Some of the ETFs in the Tax-Smart Bonds portfolio may be less liquid than funds used in Betterment’s Core portfolio. This means that it may be more difficult to buy and sell certain bond ETFs in the Tax-Smart Bonds portfolio without affecting their prices, relative to the bond ETFs in Betterment’s Core portfolio. As a result, there may be increased trading costs to enter or exit positions in the Tax-Smart Bonds portfolio relative to funds representing the same sub-asset classes in Betterment’s Core portfolio. This also may result in wider discrepancies between the market prices of the ETFs and the prices of their underlying baskets of bonds than for comparable ETFs in Betterment’s Core portfolio, particularly during times of market stress.

While Betterment’s Core portfolio is comprised of ETFs that passively track benchmark indices for their respective asset classes, the Tax-Smart Bonds portfolio both (i) includes bond ETFs that are managed by Goldman Sachs (“Goldman Sachs ETFs”) and (ii) the overall portfolio allocations are also actively reviewed and managed by Goldman Sachs. Accordingly, the Tax-Smart Bonds portfolio is subject to the risk that the fund manager may underperform its benchmark and/or not achieve the target yield for the portfolio, regardless of how the manager has performed in the past. Actively managed portfolios also are subject to style drift, meaning that active managers could take positions that are more or less risky than the target yield/risk profile. For example, portfolios may include bonds of longer duration that are sensitive to interest rate risk.  

Investors in the Tax-Smart Bonds portfolio will incur additional fund costs compared to investors in Betterment’s Core portfolio because the ETFs in the Tax-Smart Bonds portfolio have higher aggregate expense ratios than the funds used in Betterment’s Core portfolio. The specific fees for each fund in the Tax-Smart Bonds portfolio are listed in the funds’ prospectuses, which are available on the portfolio tab in your Betterment account. The fees for each yield/risk profile are subject to change, as Goldman Sachs, with respect to Goldmans Sachs ETFs, or other fund manager (if applicable), may alter at any time either the allocation of the funds used in any yield/risk profile or the expense ratios of any Goldman Sachs funds.

The Tax-Smart Bonds portfolio is only available for taxable accounts. Any dividends received will be automatically reinvested in the portfolio. Depending on the relative allocation between stocks and bonds in Betterment’s Core portfolio, the dividends and interest earned in the Tax-Smart Bonds portfolio may be taxed at higher rates than the dividends and interest earned in Betterment’s Core portfolio. Additionally, investors in the Tax-Smart Bonds portfolio may incur short-term capital gains in taxable accounts, as described in more detail below.

4. Portfolio Management Features

There are several features of Betterment’s service that either will not work or will work differently for the Tax-Smart Bonds portfolio. For goals for which the Tax-Smart Bonds portfolio is elected, Betterment’s tax loss harvesting feature will not work. Tax loss harvesting will continue to work for non-Tax-Smart Bonds portfolios in taxable accounts, although there may be reduced opportunities for TLH to harvest losses in those accounts. See Betterment’s TLH disclosures for further detail. Betterment will not recommend a glide path for goals for which the Tax-Smart Bonds portfolio is elected, and Betterment’s auto-adjust feature is unavailable for the Tax-Smart Bonds portfolio. Additionally, the Tax-Smart Bonds portfolio cannot be elected for a tax coordinated goal.

Investing portfolios require a portfolio minimum balance in order for a rebalancing transaction to occur (which can be the aggregate of balances in a tax-coordinated portfolio), see Betterment’s portfolio minimum disclosures for further details. With respect to rebalancing transactions, the Tax-Smart Bonds portfolio prioritizes achieving the target allocation designed to return the expected yield ahead of minimizing capital gains. This means that the Tax-Smart Bonds portfolio may be subject to rebalancing even if it causes an investor to incur short-term capital gains.