Simplicity Vs. Schwab’s Robo Portfolio

Nearly three years ago, Schwab launched its free robo Intelligent Portfolio and today has over $25 billion in assets. Schwab did not disclose what was in it, so I bought one in order to write about it.

I was somewhat critical in my personal look at the Schwab Intelligent Portfolio as well as a follow-up revisit of Schwab months later. Though there have been some changes, it’s still a 16-fund sophisticated portfolio.

After nearly three years, I decided to revisit how my free sophisticated factor-tilted portfolio performed against a similar three-fund portfolio and an even simpler low-cost Vanguard Target Date fund.

Since March 27, 2015, the date I bought it, my Schwab statement indicates a very handsome 7.7% annualized return. However, the equivalent three-fund broad index portfolio returned an even more handsome 9.4% annually, as did the Vanguard Target Date Fund, returning 9.1% annually. 

Is My Comparison Fair?

For the simple three-fund portfolio, I used the Dow Jones Second Grader Lazy Portfolio I designed with my son when he was eight years old. Using the ETF versions, it consists of 60% Vanguard Total Stock Market ETF (VTI), 30% Vanguard Total International Stock ETF (VXUS) and 10% Vanguard Total Bond Market ETF (BND).

I rebalanced twice a year—June 30 and Dec. 31—using PortfolioVisualizer.com. The one fund-of-funds Vanguard Target Retirement 2050 Fund (VFIFX) is 97% composed of these three funds (different share classes), and adds 3% Vanguard Total International Bond Index Fund (VTIBX).

The Second Grader Portfolio was only 10% in fixed income, while my Schwab portfolio had 10% bonds and 6% cash. Yet I would argue it is actually less conservatively invested because two bond funds are junk (Xtrackers USD High Yield Corporate Bond ETF (HYLB) and the iShares 0-5 Year High Yield Corporate Bond ETF (SHYG), and another is a local currency bond fund that acts like a volatile foreign currency fund (VanEck Vectors J.P. Morgan EM Local Currency Bond (EMLC)). That, combined with the fact that factor-tilted investing is riskier than market cap, tells me I’m actually giving Schwab the benefit of the doubt.

Why Schwab Intelligent Portfolio Underperformed

There are several reasons the sophisticated portfolio badly lagged the simple one, but a few are key. First, fees are much higher—and fees matter.

Secondly, the past three years have not been friendly to factor-tilted smart-beta strategies. Other investments such as gold (iShares Gold Trust (IAU)) have a long history of only keeping up with inflation. Finally, it has a drag related to keeping so much cash.

My Take

I suspect Schwab will continue to underperform simplicity by less than it has in the past three years. Fees and investments such as gold and local currency fixed income are flawed, and a heavy weighting in cash is a head wind it will have to fight. Factor tilting may or may not work out better in the next three years.

For those wanting a set-it-and-forget-it portfolio where no rebalancing is required, consider the original robo platform—a Vanguard Target Date Retirement Fund that meets your need and willingness to take on risk.

I’ve long since learned that complexity, expenses and emotions are the enemies of the investor. So far, Schwab remains part of a very large group of investors that seek to outsmart simplicity.

So, is the Schwab Intelligent Portfolio smarter than the Second Grader Portfolio? My answer is a resounding “no!” Most robo advisors probably aren’t either, but it’s very hard to charge much for simplicity.

Allan Roth is founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter