Schwab Intelligent Portfolios: An X-Ray

March 09, 2015

All these funds fit Schwab's criteria of being the cheapest of their type, being broad-based, with a healthy asset level, reasonable spreads and acceptable tracking error. Schwab stated that its intelligent portfolios would use 14 Schwab ETFs, so it's safe to assume they'll use Schwab ETFs wherever possible.

I'm pretty sure I've nailed this, unless Schwab decides it just can't use any Vanguard funds. I'm just sayin'.

Chuck Vs. The Competition

I can now compare Chuck's exposures with similar ones from Wealthfront and Betterment. Wealthfront's sample portfolio allocates 59 percent to equity, while Betterment's has an even 60 percent. These are all essentially 60/40 portfolios.

The Vanguard Total World Stock ETF (VT | A-100), broad-based, cap-weighted global equity fund, makes a good foil for all three—for their equity allocations, that is.

ETF.com's ETF Analytics tool gives me the ability to analyze each of these robo portfolios. Here's how they stack up.

Portfolio Statistic Schwab Wealthfront Betterment VT
Weighted Average Market Cap (Billions) 56.6 88.5 76.3 83.9
Div Yield 2.4% 2.1% 2.4% 2.2%
P/E Ratio 20.1 19.1 18.4 18.6
P/B Ratio 1.7 2.3 1.9 1.9

Data: Schwab, Wealthfront, Betterment, Vanguard, ETF.com. As of March 1, 2015.

Compared with Wealthfront and Betterment, and even VT, Chuck's portfolio has a far-smaller-weighted average market cap and costs more on a price/earnings basis, though it's cheaper price/bookwise. The market cap size is striking, as it's 67.5 percent that of the global equity market.

Schwab's $56.6 billion weighted average market cap is slightly smaller than South Korea's. For reference, the U.S. clocked in at 111.6 billion.

Fundamental Isn't The Same As Small

I wondered if Schwab's fundamental funds helped tilt the portfolio to the small-cap side. So I did a quick experiment. I rebuilt Chuck's portfolio using only Schwab's vanilla funds, and I ran it through the same analysis I used initially.

The shadow portfolio's weighted average market cap came in just $600 million higher than the published one. Now, $600 million is a lot of money, but in this context, it's nothing, as you can see in the table below.

Portfolio Statistic Chuck's Portfolio Vanilla Version
Weighted Average Market Cap (Billions) 56.6 Billion 57.2 Billion
Dividend Yield 2.4% 2.2%
P/E Ratio 20.1 19.9
P/B Ratio 1.7 1.9

The use of fundamental funds barely moves the needle in terms of equity portfolio exposures. It's largely cosmetic. So what made Chuck's portfolio tilt so small? It turns out to be shockingly simple.

Big Allocation To Small Stocks

Chuck's portfolio holds lots of small-cap funds. In the asset-class breakdown below, you'll see that Schwab's allocation to small-caps is much higher than either Wealthfront's or Betterment's.

  Schwab Wealthfront Betterment VT
Small/Micro Cap Weight 17.8% 4.9% 4.8% 7.5%

Data: Schwab, Wealthfront, Betterment, Vanguard, ETF.com. As of March 1, 2015.

It's useful to see how each of these firms allocates by asset class. Here's a breakdown:

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