Wealthfront Advisers is a registered investment advisor, and that means we have a fiduciary duty to act in your best interest. As part of that commitment, we are always looking for opportunities to help you earn more and keep more. Today, we’re excited to announce we’re releasing updated asset allocations for all of our Automated Index Investing Accounts, Automated Bond Portfolios, and IRAs. The updated portfolios are designed to further improve your risk-adjusted returns and, for all taxable accounts, improve your after-tax returns. 

Here’s a closer look at what’s changing.

Better tax optimization to improve your after-tax returns

We’ve long said that what sets Wealthfront apart from other robo-advisors is our focus on after-tax returns. Many robo-advisors use Modern Portfolio Theory, a Nobel Prize-winning theory, to build a portfolio that reflects your risk tolerance, meaning pre-tax returns are likely to be fairly similar regardless of which service you choose. But few, if any, offer the degree of automated tax minimization that Wealthfront does—and now, we’re offering portfolios that are tailored to your tax level in addition to your risk level.

If you have a taxable Automated Investing Account (whether it’s a Classic portfolio, Socially Responsible portfolio, Direct Indexing portfolio, or Automated Bond Portfolio) we’ll now offer three different versions tailored for clients with low, medium, and high tax levels. Using information you provide for your profile, we estimate your state and federal tax rates to offer you a personalized portfolio recommendation. 

The new portfolios include optimized amounts of municipal bond ETFs (in addition to other asset classes) based on your estimated tax rates. Interest from municipal bond ETFs is generally exempt from federal income tax, which can be especially advantageous for investors in higher tax brackets. For investors with lower estimated tax rates, we’ll include fewer municipal bond ETFs and more corporate bond ETFs (which have a higher expected pre-tax return) because the tax savings from municipal bonds are not as valuable at lower tax rates.

New portfolios for California residents

If you live in California, we probably don’t have to tell you that the Golden State has the highest state income tax rate in the country. In 2024, the highest marginal California tax rate is 13.3%. 

That’s why we’re excited to offer California-specific versions of all of our taxable Automated Investing Accounts, which will now include a California municipal bond ETF. The interest earned from this ETF is exempt from both state and federal income tax. This means you can now get a California-specific version of any taxable Automated Investing Account at any risk score, optimized to your tax level. Investing in California municipal bond ETFs can help investors with low, medium, and high tax brackets keep significantly more of what they earn—especially those in the highest tax brackets.

When our Investment Research team evaluates ETFs for Wealthfront’s platform, we consider important factors like expense ratio, liquidity, and tax exposure. With these things in mind, we’ve identified a pair of California municipal bond ETFs that meet our criteria, and allow us to help our California-resident clients further improve their after-tax returns. 

Improved risk-adjusted returns for all Automated Investing Accounts

We’re making additional updates to the asset allocations for all Automated Index Investing Accounts, including Wealthfront IRAs and Automated Bond Portfolios, to improve your expected risk-adjusted returns. These updates factor in market performance over the last several years, and affect both taxable and retirement accounts. You can read about these changes in much more detail in our Classic Portfolio Methodology white paper, Socially Responsible Investing white paper and Automated Bond Portfolio white paper.

How to benefit from these changes

We’ve made it easy to evaluate these new portfolios in the context of your personal situation.

  • If you already have an Automated Investing Account: We’ll help you determine whether or not you’re likely to benefit from updating to the new asset allocation. Open the Wealthfront app and go to the account dashboard for any eligible accounts, and answer a few questions about your investing timeline and tax situation. From there, we’ll help you weigh the potential tax cost of making these changes against the long-term benefits of having the updated portfolios, and we’ll transition your portfolio tax-efficiently if you decide to move forward.
  • If you don’t yet have an Automated Investing Account: We’ll automatically recommend a portfolio for any new Automated Investing Account you open based on your estimated tax level and risk tolerance—there are no additional steps for you to take.

Key takeaways

We’re delighted to offer these new asset allocations to help improve your after-tax, risk-adjusted returns. To recap, we now offer:

At Wealthfront, our products are constantly getting better. These updates are just one example of how we’re always looking for opportunities to help you earn more and keep more, so you can build long-term wealth on your own terms.

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Disclosure

The information contained in this communication is provided for general informational purposes only, and should not be construed as investment advice. Nothing in this communication should be construed as an offer, recommendation, or solicitation to buy or sell any security or adopt any investment strategy. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Wealthfront Advisers or its affiliates endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. The portfolios discussed are offered as part of Wealthfront’s Automated Investing Accounts and are subject to the terms and conditions outlined in Wealthfront’s Investment Advisory Agreement.

Wealthfront Advisers and its affiliates do not provide legal or tax advice and do not assume any liability for the tax consequences of any client transaction. The possibility of tax advantages from state municipal bond ETFs is dependent on a client’s state of residence and individual tax situation. Clients should consult with a tax professional regarding the tax consequences of investing with Wealthfront Advisers and engaging in any strategies, based on their particular circumstances. Clients and their tax professional are responsible for how the transactions conducted in an account are reported to the IRS or any other taxing authority on the investor’s personal tax returns. Wealthfront Advisers assumes no responsibility for the tax consequences to any investor of any transaction.

All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future success. Please see our Full Disclosure for important details. Investment advisory services are provided by Wealthfront Advisors, an SEC-registered investment adviser, and brokerage products and services are provided by Wealthfront Brokerage LLC, member FINRA/SIPC. 

Risk-adjusted returns cannot be guaranteed and are subject to the performance of the underlying assets and market conditions. There is no assurance that Wealthfront’s strategies will achieve their intended results or reduce the risks associated with investing. Wealthfront’s tax-optimization strategies, including tax-loss harvesting and optimized portfolio recommendations based on estimated tax levels, are designed to minimize the impact of taxes. However, the actual tax benefits realized by clients will vary depending on individual circumstances, and Wealthfront does not guarantee specific tax outcomes. Changes to tax laws or investor behavior may affect the tax optimization strategies discussed.

Municipal bond ETFs, including California-specific municipal bond ETFs, may provide interest that is exempt from federal income tax and, in some cases, state income tax. However, certain municipal bond income may be subject to the federal alternative minimum tax (AMT) or other state and local taxes. Tax savings from municipal bonds are most beneficial for investors in higher tax brackets, and may not provide significant benefits to investors with lower tax rates. Please consult your tax professional to understand how the tax treatment applies to your specific situation. California municipal bond ETFs included in portfolios for California residents may offer additional tax benefits specific to California state income tax. The potential tax advantages of investing in California-specific municipal bond ETFs are most significant for individuals in the highest California tax brackets. Clients should consider their own state tax rates when evaluating the potential benefits of these portfolios.

Certain ETFs available to Wealthfront’s clients are labeled by Wealthfront as “Socially Responsible”. In order to be labeled as socially responsible, an ETF must meet at least one of the following criteria: (1) The ETF tracks an index marketed as seeking to adhere to socially responsible or ESG principles through the selection and weighting of its constituents (2) The ETF tracks an index which specifically excludes companies involved in environmentally destructive businesses such as oil and gas exploration and refining, thermal coal, oil sands, palm oil harvesting, or unsustainable production of forest products (3) The ETF tracks an index which favors companies, via the selection or weighting of its constituents, engaged in businesses related to: clean or renewable energy; electric vehicles or clean transportation; or sustainable agriculture and/or forestry (4) The ETF tracks an index which favors companies, via the selection or weighting of its constituents with policies and practices supporting of empowerment of women, minorities, or members of any disadvantaged class, or the inclusion of women, minorities, or members of any disadvantaged class in leadership positions.

Wealthfront Advisers, Wealthfront Brokerage, and Wealthfront are wholly owned subsidiaries of Wealthfront Corporation.

© 2024 Wealthfront Corporation. All rights reserved.

About the author(s)

Alex Michalka, Ph.D, has led Wealthfront’s investment research team since 2019. Prior to Wealthfront, Alex held quantitative research positions at AQR Capital Management and The Climate Corporation. Alex holds a B.A. in Applied Mathematics from the University of California, Berkeley, and a Ph.D. in Operations Research from Columbia University.

Fang Rui is a Chartered Financial Analyst (CFA) and an investment researcher at Wealthfront. Prior to Wealthfront, Fang spent nearly a decade at BlackRock where she worked in ETF and index research as well as risk management. She earned a Master of Science in Industrial Engineering and Operations Research from University of California, Berkeley and earned a Bachelor of Science in Engineering with a major in Operations Research and Financial Engineering from Princeton University.