Smart Portfolio Strategy – I-wize Group


Effective January 1, 2016.

I-wize offers a smart portfolio strategy (“smart portfolio”) for investors who wish to take greater systematic risk at a given allocation between stocks and bonds than is possible with a comparable allocation in the standard, default I-wize portfolio strategy (“I-wize’s core portfolio”).
The smart portfolio incorporates certain stock exchange traded funds (“ETFs”) that do not weight their holdings solely based on market capitalization (“smart equity ETFs”). The smart equity ETFs make rules-based adjustments to the market weights of their holdings based on four factors that have been identified in academic research as persistent drivers of investment returns in stocks: good value (measured by price to cash flow, price to sales, and price to book value ratios), high quality (measured by gross profits to total assets), low volatility (measured by standard deviation of returns), and strong momentum (measured by risk-adjusted returns over a defined period of time).
The smart portfolio also incorporates certain fixed income ETFs that do not weight their holdings solely based on market capitalization (“smart fixed income ETFs,” collectively with smart equity ETFs, “smart ETFs”). The smart fixed income ETFs make rules-based adjustments to the market weights of their holdings based on certain historical factors that have detracted from performance, including metrics relating to the amount of debt and profitability of the bond issuers.
In addition to using certain smart ETFs, the smart portfolio differs from I-wize’s core portfolio in several material ways. The smart portfolio allocates more of its bond holdings to high yield and longer duration bonds, which are riskier than the bonds held in I-wize’s core portfolio. Additionally, the smart portfolio includes a Real Estate Investment Trust (“REIT”) ETF, which is included in the stock allocation of the portfolio. I-wize’s core portfolio includes exposure to REITs through certain of its stock ETFs, but it does not include investments in REIT ETFs. REITs are subject to unique risks. In particular, REIT ETFs are sensitive to increases in interest rates. REIT ETF dividends are also taxed at ordinary income rates, rather than at the preferential rates at which dividends from other ETFs may be taxed.
The smart portfolio is designed by Goldman Sachs Asset Management (“Goldman Sachs”) and is generally comprised of ETFs managed by Goldman Sachs but may also include ETFs managed by other fund managers. Because Goldman Sachs earns management fees from the Goldman Sachs ETFs it selects for the smart portfolio, Goldman Sachs has a financial incentive to select its own funds for inclusion in the portfolio, even if those funds have higher costs than comparable ETFs offered by other fund managers.
The smart portfolio currently includes smart equity ETFs for U.S. large capitalization, U.S. small capitalization, international developed market, and international emerging market stocks, and the portfolio also includes smart fixed income ETFs for investment grade and high yield bonds. Further detail regarding the ETFs included in the smart portfolio, and Goldman Sachs’ methodology for constructing its smart ETFs, 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 account.
The selection and relative weights of ETFs in the smart portfolio for a given allocation of stocks and bonds is determined by Goldman Sachs. Goldman Sachs may, at its discretion based on an evaluation of market conditions, change the relative weights of sub-asset classes within a particular allocation of stocks and bonds. For example, the target percentages of U.S. stocks, international developed market stocks, and emerging market stocks in a portfolio may vary even though the investor makes no change to the portfolio’s overall stock/bond allocation.
I-wize places trades to achieve the designated ETF allocations but retains discretionary authority not to recommend a portfolio it deems unsuitable for a client’s investment needs. Goldman Sachs reevaluates quarterly the selection of ETFs for each allocation, at which time Goldman Sachs may add or remove ETFs from the smart portfolio. Although I-wize will endeavor to implement changes to the smart portfolio as soon as possible after they are communicated by Goldman Sachs, there may be a delay of up to ten business days. If Goldman Sachs adds an ETF to the smart portfolio, I-wize typically will obtain exposure to that ETF through future investor contributions, dividend reinvestments, and/or rebalancing transactions to correct drift in the portfolio’s overall allocation.
The ETFs in the smart portfolio may be less diversified than the ETFs for comparable asset classes in I-wize’s core portfolio because the smart ETFs may concentrate their investments in certain industries or groups of industries, or exclude certain securities that do not satisfy the factor criteria. This may increase the risk of loss due to adverse economic, business, or other developments that affect those industries or companies. Reduced diversification also may increase the volatility of the smart portfolio relative to I-wize’s core portfolio.
Smart ETFs may be less liquid than the broad market ETFs used in I-wize’s core portfolio. This means that it may be more difficult to buy and sell certain ETFs in the smart portfolio without affecting their prices, relative to the ETFs in I-wize’s core portfolio. As a result, there may be increased trading costs to enter or exit positions in the smart portfolio relative to funds representing the same asset classes in I-wize’s core portfolio. This also may result in wider discrepancies between the market prices of the ETFs in the smart portfolio and the prices of their underlying baskets of securities than for comparable ETFs in I-wize’s core portfolio, particularly during times of market stress.
Investors in the I-wize smart portfolio will incur additional fund costs compared to investors in I-wize’s core portfolio because the ETFs in the smart portfolio have higher aggregate expense ratios than the funds used in I-wize’s core portfolio. The specific fees for each fund in the smart portfolio are listed in the funds’ prospectuses, which are available on the portfolio tab in your account.
The smart ETFs are rebalanced quarterly to match the indices the funds track, which also are updated quarterly. Such portfolio turnover may lead to increased trading costs relative to the ETFs in I-wize’s core portfolio, including brokerage commissions and taxes on short term capital gains. These costs are not included in the expense ratios of the smart ETFs (described above) but are included in the funds’ overall performance. Accordingly, portfolio turnover costs may cause smart ETFs to underperform the indices they track by a relatively greater amount than the ETFs in I-wize’s core portfolio, which have less turnover.
Investors considering the smart portfolio should understand how it impacts the operation of I-wize’s tax coordinated portfolio feature. The smart portfolio can be elected for goals in a tax coordinated portfolio, but all goals in that tax coordinated portfolio currently are required to use the smart portfolio.
Investors considering the smart portfolio should understand how it impacts the operation of I-wize’s tax loss harvesting feature. I-wize typically implements its tax loss harvesting feature by shifting allocations among three ETFs in each sub-asset class. The smart portfolio uses only two ETFs for each bond sub-asset class and for REITs, which limits the functionality of tax loss harvesting for households with IRAs that have elected the smart portfolio for one or more goals.
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