Schwab Intelligent Portfolios: An X-Ray

March 09, 2015

Schwab tossed a big bone to robo-advisor watchers with the recent publication of "About Schwab Intelligent Portfolios." This guideline to Schwab's asset allocation and ETF selection strategies outlines what investors can expect from Chuck's robo-advisor service, now that it has been launched.

For me, it was a juicy invitation to return to my seven blogs on robo advisor portfolios, with a new focus on Schwab's robo service.

Schwab's portfolios—at least the one that I looked at, aimed what the company called "Investor #2"—really stand out from the competition. Not so much for their headline-grabbing cash allocation or foray into strategic beta as for their actual asset allocation. You see, Chuck has bet big on small-caps.

Schwab's large allocation to cash and their inclusion of Fundamental ETFs—funds based on indexes that select or weight securities based on information in corporate balance sheets or income statements—have generated lots of press, and rightly so. Cash can drag down portfolio returns in a rising market, and could be costly to access if doing so triggers rebalance trading.

Fundamental funds seem like a big departure from the dirt-cheap cap-weighted funds in high-profile robo portfolios, but shifting robo portfolio exposure away from the unbiased opportunity set isn't new, as I explained last summer. Betterment and Future Advisor have been including value funds in their portfolios for some time now, while Wealthfront allocates to the Vanguard Dividend Appreciation ETF (VIG | A-69). None of these portfolios is quite as vanilla as it seems.

But neither of these aspects matters as much in the end as the overall asset allocation. As always, that's what drives returns over the long term. That's why I was delighted to see that Schwab offered three sample portfolios for robo-watchers to examine.

I decided to focus on Schwab's sample portfolio for someone they call Investor 2. That's kind of impersonal, so I'm going to call him "Chuck."

Getting To Know Chuck

To be clear, Schwab has presented only three model portfolios so far. There's no way of knowing whether Chuck—that is, Investor 2—has a typical portfolio.

Let's focus on what we do know. Chuck's middle-of-the-road portfolio holds 61 percent equity, 34 percent fixed income/cash and 5 percent commodities. Call it a classic 60/40 split. Using Schwab's ETF selection process guidance, I filled in tickers and fund names for the equity portion of this portfolio. I left the fixed-income portion for another day, because I wasn't confident I could deduce its exact holdings.

Here's what I think Chuck's holding, equitywise:

Chuck's Probable Equity Allocation

Stocks Probable
Probable Fund Name 61%
US Large Company Stocks SCHX Schwab U.S. Large-Cap 7.0%
US Large Fundamental FNDX Schwab Fundamental U.S. Large Company 11.0%
US Small Company Stocks SCHA Schwab U.S. Small-Cap 4.0%
US Small Fundamental FNDA Schwab Fundamental U.S. Small Company 6.0%
International Developed Large Company Stocks SCHF Schwab International Equity 5.0%
International Developed Large Fundamental FNDF Schwab Fundamental International Large Company 7.0%
International Developed Small Company Stocks SCHC Schwab International Small-Cap Equity 3.0%
International Developed Small Fundamental FNDC Schwab Fundamental International Small Company 5.0%
International Emerging Market Stocks SCHE Schwab Emerging Markets Equity 3.0%
International Emerging Market Fundamental FNDE Schwab Fundamental Emerging Markets Large Company 5.0%
US Exchange Traded REITs SCHH Schwab U. S. REIT 3.0%
International Exchange Traded REITs VNQI Vanguard Global ex-U.S. Real Estate 2.0%

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