Tag Archives: aggregate-bond

SCHZ: A Remarkably Complete Bond Fund

Summary I’ve been looking for some medium to high quality fixed income investments. My preferred method of making the investments is buying ETFs. I want something with decent yields, excellent internal diversification, and reasonable or better levels of liquidity. I would accept some credit risk or some duration risk to increase yields, but expense ratios have to be low. SCHZ offers investors an incredibly diversified portfolio of fixed income investments and I may use it from time to time. Since the Schwab U.S. Aggregate Bond ETF (NYSEARCA: SCHZ ) is a Schwab ETF it is eligible for free trading in Schwab accounts. Since I want to be able to use my bond ETF as a place to park cash and earn some yield off of it, I want that free trading to move money in and out. With an expense ratio of only .05% (not a typo), I’m very impressed with this ETF. To be fair, the largest factor in my decision to open accounts with Schwab was the free trading on low fee ETFs. It shouldn’t be surprising that I like several of their funds since I picked them as a brokerage after I glanced at their ETF offerings. The Good The portfolio offers an absolutely remarkable diversification of fixed income investments. Investors are getting exposure to treasury securities, mortgage pass-thru securities, and corporate bonds. There are even small allocations to non-us corporate debt, municipal bonds, and other small sections of the market. For a fixed income investor looking for one stop shopping for a bond ETF, this is probably one of the best options on the market. The average volume is running around 170,000 shares per day which is enough liquidity to avoid any major concerns. The average yield to maturity is running 2.46%. Given the low interest rate environment we are facing at a macroeconomic level, this is pretty reasonable. All fixed income investors would love to see higher yields on their investments, but 2.46% is solid compared to any similar alternatives. The effective maturity is over 7.3 years and the effective duration just over 5.3 years. That level of duration risk is fairly reasonable for matching my risk tolerance. If yields were higher on a macroeconomic level, I would be willing to tolerate more duration risk. The Bad While the portfolio is a strong contender for one stop shopping, as an mREIT analyst I can’t stomach paying NAV for an investment containing MBS. I can acquire my MBS exposure at a substantial discount to NAV, though I must admit that when buying mREITs I am effectively paying a much higher expense ratio. Regardless, when mREITs trade at huge discounts to NAV, I don’t want my portfolio to include any exposure to MBS where I am paying NAV. I expect that within the next few years we will see fair values for MBS take a meaningful hit. I want that expectation priced into my investment. Overall, holding MBS is not a bad thing. If mREITs were trading at a premium to book value, I would happily be buying into an ETF that trades around NAV and holds the same securities. When mREIT share prices and book values align, I’ll be tempted to make SCHZ a portion of my investment portfolio. It is a solid ETF that is hampered only by the fact that investors have the opportunity to buy MBS exposure at a discount to NAV. The category for “Mortgage Pass-Thru” is currently weighted at 28.9% of the portfolio. This comes in second for weightings with U.S. Treasuries over 36%. The third category is U.S. Corporate with a weight just over 21%. Interesting Notes I tend to be a buy and hold investor with the exception of being willing to do some trading in microcap securities when I think a lack of coverage is allowing prices to deviate from intrinsic value. When it comes to a bond ETF, I want to be able to rapidly move money in and out and of the investment so it functions as a cash fund. I find it interesting that the portfolio turnover is 74% for the Schwab U.S. Aggregate Bond ETF. Frequently I see high portfolio turnovers with excessively high expense ratios, but here the expense ratio is incredibly low. I don’t mind the portfolio turnover since there is no high expense ratio. My problem is not an issue with frequent trading in an ETF; I simply don’t want to pay for it. If it is free, that is fine with me. Conclusion The Schwab U.S. Aggregate Bond ETF is an exceptional bond fund with a low expense ratio and great internal diversification. The only thing that keeps from selecting it as a fixed income investment is that I’m trying to avoid buying MBS at NAV when I cover mREITs and feel confident that I can select solid mREIT investment options on my own. I want to use the diversified low fee ETFs for everything else. When mREITs see share prices and NAVs align, SCHZ will be a very strong contender for use as a fixed income investment or for parking cash while I wait for other opportunities in equity investing. I feel the market is a little frothy and I’m looking to shift my portfolio to have slightly less risk to a downturn in the equity markets while still making enough money off yields to offset inflation. This ETF does both of those things, so the exposure to MBS is the only reason I’m not using it right now. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SCHZ over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

Balanced Portfolio By Age: How To Find Your Perfect Portfolio

Does having a balanced portfolio by age lead to a desired portfolio? We have the answer for you. The question of optimum portfolio mixture based on your age comes up frequently. The general concept seems to be that the older we are, the more conservative we have to be because we do not have as long to recover from losses. On average, a 20 year-old has a lot longer to recover from a market downturn than an 80 year-old. We have done some research on how long it took to recover from major downturns with different stock and bond mixtures. What many may find surprising is how similar the recovery time has been for the different portfolio mixtures. See “How to Make an Investment Portfolio: 6 Steps to Better Investing” for a description of portfolio design. Balanced Portfolio by Age – Drawdown and Recovery To represent the stock market, we used the Russell 3000 Index, which makes up a majority of the United States stock market. We used the Barclays Capital Aggregate Bond Index to represent the bond market, which makes up most of the United States bond market. The chart shows the worst time frame (max drawdown) for each mixture from January 1979 to September 2013. Each column shows the percentage in Russell 3000 Index. The unstated remaining portion is the amount in the Barclays Capital Aggregate Bond Index. The chart below shows how long in months each mixture dropped. This is shown in red. Then how many months it took to recover, which is shown in green. Investors can add both the drawdown months and the recovery months to figure out how long it would take to get back to where they started in each of these portfolios. For example, the 70% mixture, which is 70% Russell 3000 Index and 30% Barclays Capital Aggregate Bond Index, fell for 16 months and then took 26 months to recover, which means your investment would have taken 42 months (16 down+26 up) to fully recover during the worst fall, for this mixture, since January 1979. See “Best Method to Evaluate Investment Risk” for complete information on how to evaluate the risk of your portfolio. (click to enlarge) What conclusions can we draw from this research? First, the future may not be like the past, although since we do not have a crystal ball or a time machine, looking back is often the best tool we have available. Next, we find the most interesting portion of this research was to discover how many of the portfolios were so similar in terms of total recovery time. Historically, there were three main groupings: 0 to 10% stock 30 to 70% stock 80 to 100% stock In each one of these groupings, you almost had the same total recovery time. It would seem to make sense to take the higher stock percentage portfolio in each grouping because over a longer period of time, the more stock in the portfolio the more total return. Balance Portfolio by Age – More Stock Market Exposure Equals More Money Over The Long-Term You can see that relationship between more stock market exposure and more money in this next chart, which shows the value of each of the above portfolio if you invested $100,000 in January 1979. Most investors do not think about investing for the next 35 years, but looking at long-term data can be useful because they capture more market cycles. This chart shows a perfect long-term correlation between more stock market exposure and more money. On average, the more stock market exposure you have the more you make. See “The 5 Pillars of Effective Asset Management” for a series of articles on how to maximize your returns. (click to enlarge) For example, you can see historically, it would have been much better to take the 70% stock portfolio than the 30% stock portfolio, especially when you consider the total recovery time was only four months longer for the 70% stock portfolio during the worst time period for each portfolio. Balance Portfolio by Age – Finding Your Personal Risk Tolerance There is a catch. Each person has to consider age, especially when considering how long it will take your portfolio to recover, but more importantly you need to consider personal risk tolerance. How much risk can you take before you panic and sell? This chart shows the low value for a $100,000 investment made just before the max drawdown started in each of the above mixtures. This effectively shows what would have happened if you invested $100,000 in each of the above portfolios just before the worst downturn for each of these portfolios. This chart shows you what your worst monthly statement would have been before it finally recovered many months later. (click to enlarge) As you can see, there is a fairly significant difference in the low value between the 30% stock portfolio and the 70% stock portfolio. Incredibly, even with that difference it only took four months longer for the 70% portfolio to recover, but if the account fell more than you could tolerate, you’re never going to see that recovery. The most important part of finding a balanced portfolio by age is finding your personal risk tolerance at your current age. Examine the historical maximum drawdown periods for the portfolio mixtures you are considering. See how much you can lose and how long it takes to recover. Lastly, see how much you might make. This full examination of the possibilities will help you determine the perfect portfolio for your age.