Schwab Intelligent Portfolios: An X-Ray

March 09, 2015

Asset Class Schwab Wealthfront Betterment
Equity: U.S. - Total Market 0.0% 30.0% 11.6%
Equity: U.S. - Large Cap 18.0% 0.0% 0.0%
Equity: U.S. - Large Cap Value 0.0% 0.0% 11.6%
Equity: U.S. - Mid Cap Value 0.0% 0.0% 3.7%
Equity: U.S. - Small Cap 10.0% 0.0% 0.0%
Equity: U.S. - Small Cap Value 0.0% 0.0% 3.2%
       
Equity: Developed Markets Ex-U.S. - Total Market 5.0% 13.0% 24.7%
Equity: Developed Markets Ex-U.S. - Large Cap 7.0% 0.0% 0.0%
Equity: Developed Markets Ex-U.S. - Small Cap 8.0% 0.0% 0.0%
       
Equity: Emerging Markets - Total Market 3.0% 9.0% 5.2%
Equity: Emerging Markets - Large Cap 5.0% 0.0% 0.0%
       
Equity: Global Ex-U.S. Real Estate 2.0% 0.0% 0.0%
Equity: U.S. - High Dividend Yield 0.0% 7.0% 0.0%
Equity: U.S. Real Estate 3.0% 0.0% 0.0%
       
Total 61.0% 59.0% 60.0%

Data: Schwab, Wealthfront, Betterment, Vanguard, ETF.com

Schwab's small-cap allocations hits hard in two ways: the size of the allocation, and the way Schwab draws the line between large- and small-cap.

Schwab's 10 percent to U.S. small-caps and 8 percent to developed market ex-U.S. small-caps takes up 29.5 percent of Chuck's equity allocation. Yet the Schwab U.S. Large Cap ETF (SCHX | A-95) covers roughly 89 percent of the investable U.S. market, leaving only 11 percent for the Schwab U.S. Small Cap ETF (SCHA | A-94).

The developed markets ex-U.S. situation is identical.

This means Chuck has nearly 30 percent of his portfolio allocated to 11 percent of the cap spectrum—an almost 3:1 ratio. Simply put, Chuck's got about three times as much weight to developed-market small-caps as he would if he just held VT.

That's definitely a distinctive portfolio.

The Price Of A Small-Cap Tilt

Schwab's big bet on developed-market small-caps might be perfect for Chuck, given his profiled above-average risk tolerance and his 15- to 19-year investment horizon. That is, if small-caps continue to outperform versus the overall market, as they have for the past five years. But small-caps can be quite risky, falling harder than large-caps when markets turn south.

That's what makes this such a big bet, and why it's clear that this new so-called intelligent portfolio isn't just a me-too product. It might not be for everyone, but that's OK. Investor choice is a good thing, especially when competition drives innovation.

It's good to get a glimpse of what Schwab robo-portfolio investors can expect from this new service. We're all eager to see the full rollout later this month. Let's just hope investors take a careful look under the hood, and understand what their exposures are. I'll be right there with them.


At the time this article was written, the author held no positions in the securities mentioned. Contact Elisabeth Kashner at [email protected].

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