Why Wealthfront and Betterment Avoid REITs in Aggressive Portfolios

Introduction

When it comes to investment platforms like Wealthfront and Betterment, the emphasis is often on low-cost, diversified investment portfolios that prioritize broad market exposure through index funds and ETFs. However, one question that Frequently Arises is why these platforms do not invest in Real Estate Investment Trusts (REITs) for their most aggressive clients.

Investment Strategy

Passive Investment Strategy

Both Wealthfront and Betterment primarily adopt a passive investment strategy that aims to track market indices. REITs, although they offer exposure to real estate, may not fit neatly into their core philosophy of achieving broad diversification through equities and bonds. This adherence to a passive strategy ensures that clients' portfolios are not overly complex and maintain a consistent approach.

Asset Allocation

Traditional Asset Allocation

REITs are often classified as a separate asset class, distinct from stocks and bonds. Wealthfront and Betterment prefer to maintain a more traditional allocation between stocks and bonds in their aggressive portfolios. Equities, which have historically provided higher returns over the long term, form the core of their investment strategy. This traditional allocation helps in managing risk and ensuring that clients' portfolios can withstand economic fluctuations.

Volatility and Risk

Volatility Manipulation

REITs can introduce additional volatility and risk, particularly during economic downturns. These platforms may choose to limit exposure to such assets for clients seeking aggressive growth. By avoiding REITs, Wealthfront and Betterment can maintain a level of predictability in their portfolios, ensuring that clients are not subjected to sudden and significant fluctuations in value.

Tax Considerations

Tax Efficiency

REITs are known for their high dividends, which can lead to higher tax rates for investors. A significant portion of the income from REITs is typically distributed to shareholders, making REITs a less tax-efficient investment compared to qualified dividends from stocks. Wealthfront and Betterment aim to provide tax-efficient strategies for their clients to minimize tax liabilities and ensure that returns are maximized.

Liquidity and Market Conditions

Investment Flexibility

REITs can be influenced by different factors than traditional equities, such as interest rates and real estate market conditions. This added layer of complexity may not be suitable for clients seeking high-growth opportunities. Wealthfront and Betterment's platforms are designed to be simple and straightforward, making them more attractive to clients who prefer a focus on high-performing equities rather than assets that may be more volatile and influenced by unique market conditions.

Conclusion

In summary, Wealthfront and Betterment prioritize broad market exposure and simpllicity in their investment philosophies, which may lead them to exclude REITs from their aggressive portfolios. This approach ensures that their clients have transparent and manageable investment options with a focus on long-term growth and tax efficiency.

Further Reading

For those interested in diversification and strategic asset allocation, exploring other options such as low-cost ETFs and index funds can provide a balanced approach to investing. Wealthfront and Betterment offer a range of investment vehicles that are carefully selected to meet the goals of various risk profiles.