Wealthfront’s Portfolios Are Now Even More Tax-Optimized
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.