Genome-wide association studies (GWAS) have identified polymorphism in the Apolipoprotein E gene (APOE) to be the most prominent risk factor for Alzheimer’s disease (AD). Compared to individuals homozygous for the APOE3 variant, individuals with the APOE4 variant have a significantly elevated risk of AD. On the other hand, longitudinal studies have shown that the presence of the APOE2 variant reduces the lifetime risk of developing AD by 40 percent. While there has been significant research that has identified the risk-inducing effects of APOE4, the underlying mechanisms by which APOE2 influences AD onset and progression have not been extensively explored. In this study, we utilize an isogenic human induced pluripotent stem cell (hiPSC)-based system to demonstrate that conversion of APOE3 to APOE2 greatly reduced the production of amyloid-beta (Aβ) peptides in hiPSC-derived neural cultures. Mechanistically, analysis of pure populations of neurons and astrocytes derived from these neural cultures revealed that mitigating effects of APOE2 are mediated by cell autonomous and non-autonomous effects. In particular, we demonstrated the reduction in Aβ is potentially driven by a mechanism related to non-amyloidogenic processing of amyloid precursor protein (APP), suggesting a gain of the protective function of the APOE2 variant. Together, this study provides insights into the risk-modifying effects associated with the APOE2 allele and establishes a platform to probe the mechanisms by which APOE2 enhances neuroprotection against AD.