Revisiting My Schwab Robo Portfolio

On March 9 of this year, Schwab launched its robo advisory Intelligent Portfolios with no advisory fees. I couldn’t figure out any way to see exactly what funds were included and in what proportions without buying into it. Thus, I bought an Intelligent Portfolio on March 30 and wrote about a personal look at Schwab’s robo advisor. I held on to my Schwab Intelligent Portfolio, though, in some ways, it’s not looking all that intelligent.

A Little Background

I selected a risky portfolio in order to keep less cash. About 18% of the portfolio was in cash and bonds. Its characteristics were:

• A total of 15 ETFs plus cash were used to construct the portfolio
• Schwab funds and cash held at Schwab represented about 82.4% of the value of the portfolio
• Expenses averaged 0.27% and ranged from 0.04% to 0.48% annually
• The 10% of the portfolio located in bonds was in lower credit quality, although the local currency bond was technically investment grade at BBB-

The full lineup and weighting when I originally wrote about it was as follows.

In the original piece, I stated the Schwab Intelligent Portfolio has funds in which I'd never dream of investing, such as the Market Vectors J.P. EM Local Currency Bond Fund (EMLC | C-54). With an expense ratio of 0.47%, I suspected this would move more with foreign currency changes than the bond market. Before I wrote the original piece, I asked Schwab for the reasoning to include this fund, but received no response.

Schwab Intelligent Portfolio Today

As of the morning of Dec. 15, my portfolio had declined 7.40% from my March 30 purchase, and it still owned the same 15 ETFs. I compared this performance to broad market ETF total returns, which were: the Vanguard Total Stock (VTI | A-100), down 2.19%; the Vanguard Total International Stock (VXUS | A-99), down 10.50%; and the Vanguard Total Bond (BND | A-94), down 1.05%.

Comparing the 7.40% loss to an 82% equity-weighted version of my son’s Second Grader Portfolio (one of the Dow Jones Lazy Portfolios) that owns only the three funds above, the Second Grader was down only 4.26%. Thus, the Intelligent Portfolio lost over 3 percentage points more than the Second Grader.

The largest single contributor to the performance shortfall was in fixed income. Rather than go for boring bonds to act as a portfolio shock absorber, Schwab reached for yield with the Market Vectors J.P. Morgan Emerging Market Local Currency ETF (EMLC | C-54), and iShares High Yield Corporate ETF (SHYG | B-81), which showed unrealized losses of 15.38% and 9.63%, respectively.

As I stated last April, the local currency bond ETF did act more as a foreign currency bet than a bond fund. Schwab spokesperson, Michael Cianfrocca, provided me with the following link as to why that fund was included and noted that assets in Intelligent Portfolios are $4.1 billion through Sept. 30, 2015.

Other contributors to underperforming the simpler Second Grader Portfolio were a heavier international stock allocation, the iShares Gold ETF (IAU | A-100), and factor bets toward small-cap and value.

Finally, the Schwab Intelligent Portfolio has annual expenses nearly four times that of the Second Grader Portfolio. Ironically, the heavy weighting in cash is something for which I criticized Schwab, yet it actually helped gain back some underperformance versus the basic Second Grader Portfolio. But I stand by that criticism. Cash earning 1.05% at a bank like Synchrony Bank is a far better option.

My Takeaway

Anything could have happened over the past several months, and performance during this period proves nothing. Still, it does at least provide indications that the flaws I pointed out last April continue to be valid. Higher fees, fixed income reaching for yield, and narrower investing are not optimal investment strategies.

In my opinion, the Schwab Intelligent Portfolio isn’t dumb, but perhaps it’s time for version 2.0.

At the time this article was written, Allan Roth owned positions in all of the securities mentioned. He is founder of Wealth Logic LLC, an hourly based financial planning firm. Roth is required by law to note that his columns are not meant as specific investment advice. He also writes for the Wall Street Journal, AARP and Financial Planning Magazine.