Betterment has launched a savings/checking account alternative called ‘Smart Saver’. Unlike traditional savings/checking accounts this account is not FDIC or NCUA insured. Smart saver’s break down is as follows:
- U.S. Short-Term Treasury Bonds – SHV – 80% of the allocation
- U.S. Short-Term Investment Grade Bonds – NEAR – 20% of the allocation
They expect the yield to be 1.78%. To be frank, this product absolutely sucks. Here’s why:
- Your money is not insured. Traditionally a savings account has FDIC or NCUA insurance, that way if the financial institution is subject to a bank run or otherwise folds your money is protected. This is not the case with this product.
- The expected yield is lower than other accounts. Other accounts are now offering 2.25% with no requirements and up to 5% APY with requirements. Betterment is predicting a yield of 1.78%.
- It’s not liquid. You can’t immediately access your funds, Betterment states that it will take 4-5 business days to transfer back to your bank account.
The one advantage to this account is that it looks like it exempt from state and local taxes.
Hat tip to readers Ryan & Jonathan
This might be worth another look. The current projected yield is 2.20%, and the majority of dividends (about 79%) are US Government Interest, which is exempt from state and local tax. Especially in high tax states/localities, and if you don’t want to keep jumping between banks to chase the highest possible return, this is a pretty appealing alternative to a savings account.
One other point, if you refer three people to Betterment, you’ll get 15 months fee-free, bumping up the yield another 0.25% for that period of time (so, currently, the yield would be 2.45%, and about 79% of that return will be exempt from state and local tax).
Entirely useless? seems like you dont know much about finance. yawn
So why don’t you tell us why you think this is more useful than a 2.25% FDIC-insured liquid account?
Some day you won’t manage your finances like a poor person, I have faith. Until then, I’ll let you wonder what role bond funds can productively play in managing one’s liquidity and return objectives across the business cycle.
If you are solely focusing on FDIC insurance and a 2% interest rate, that tells us all we need to know about your personal finances.
So a “rich” person takes on unnecessary risk with a lower return then taking the option with absolutely no risk and a guaranteed higher return? Man times have really changed…guess the “risk-taking” mentality gets them in the mood to make crazy investments that make them rich then?
That’s the equivalent of saying you manage your finances like a poor person because you’re not taking a job that “may or may not” pay $65,000 a year depending on how business is through commission, rather than a job that pays an $85,000 salary with guaranteed job security.
If the market changes again, this may be a viable option. But in it’s current state you would have to be a complete moron to do this, so yes it’s entirely useless
Depending on your view of rates. Your 2.25% is “floating”. If rates drop that will come down. If rates drops the treasuries are fixed so you would come out ahead.
I still wouldn’t do it since I don’t think we are in a falling rate environment.
My rule of thumb: anytime a product markets itself as “smart”, it is targeting those anything but smart.
saying not FDIC insured is correct but cavalier. These products are either bonds that are held or ETFs in bonds, either way they are securities and Betterment as a member of SIPC has 500K SIPC insurance per account.
You are not principal protected but they are generally safe principal products.
That being said, yes the yield sucks
With top online savings banks earning about a 2% guaranteed yield, to add the additional risk of loss of principle without any additional reward is ludicrous. They also don’t highlight what would happen in a down market and how you can actually “lose” 2% of your money in bad market years, and imo are quite deceiving in how they present this, assuming that the market will consistently be up. The way this is being marketed should really be looked at harshly by the SEC
I agree that doing this vs 2% at a bank is completely ludicrous, however a comment comments. 1 – then make the article about risk vs. return, not about FDIC insurance… again SIPC, its misleading. 2 – your point about a down market is also off base as well. This would potentially perform better in a down market because rates would drop on bonds and bank accounts leaving you with a lower bank return. In that instance the treasury bonds would actually increase in value.
That all being said, this is a foolish product, if you want to pick-up yield go out on a CD ladder and take duration risk or at least to a savings account.
You are assuming the a down market = stock market. First, The OP might mean a down bond market which the interest rate spike up. Second your assumption of bond yield would drop if the stock market is down is incorrect. The bond yield can still keep go higher if inflation pick up even with the stock market going down, look at the 70s.
SPIC only protects you against fraud or the broker folding, it does not protect you from any losses the issuer of the bond folding.
But again, behind all of FDIC and SPIC the treasury is the one that does provide the insurance guarantees, it makes zero sense to wish for a treasury-backed insurance on a treasury issued bond.
Which is exactly why i said your not principal protected
While treasury bonds are not FDIC insured, they do have an even smaller change of default. The FDIC will stop paying money much sooner than the Treasury in case of a Black swan financial crash. Some even say treasuries = risk-free.
You can only lose money with them when rates rise, but with short term bonds it’s extremely limited.
The 20% corporate bond allocation however doesn’t make sense.
The Treasury bonds should not be subject to state / local taxes, but the corporate bond portion certainly will be.
And if you’re OK without FDIC insurance, it seems like you’d be better off in a Vanguard Short-Term Treasury fund (yield 2.40%) or Short-Term Corporate fund (yield 3.36%).
No you wouldn’t, because the funds you mention lose value when interest rates rise. You want a money market fund (like VMMXX, VMFXX) and hope that it doesn’t “break the buck” (because there’s no insurance).
Betterment has basically built a money market fund here. Most treasury MMFs are similarly invested and have similar returns. Regarding breaking the buck, with the new regulations after the 2008 crisis, they restricted what the constant NAV MMF funds can invest in. The kind of commercial paper and repo investments that caused some funds to break/almost break the buck in the crisis is now only allowed if you have a floating NAV.
So AC is right, compare this vs an MMF, and question why not to use a large MMF with economies of scale.
Just to be clear – Treasury bonds are subject to federal tax.