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The ETF Monkey 2016 Model Portfolio: Charles Schwab Implementation

Summary In a previous article, I introduced The ETF Monkey 2016 Model Portfolio. This portfolio offers my suggested model for 2016 based on careful review of the 2016 outlook from multiple high-quality research firms and/or investment providers. In that article, I also promised to build and then track practical implementations of the portfolio using ETFs from three different providers. This is the Charles Schwab implementation. This article is designed to be read in conjunction with the article in which I introduced The ETF Monkey 2016 Model Portfolio . In that article, I offered what I believe to be a model portfolio for 2016, based on my reading and analysis of materials related to the 2016 outlook from several top-quality sources. I further explained that I would both build and track actual implementations of this portfolio using ETFs from three major providers; Vanguard, Fidelity (featuring iShares funds) and Charles Schwab. This article features the Charles Schwab implementation. Overview I will start with a couple of tables. The first will briefly recap the asset classes and weightings that I identified in The ETF Monkey 2016 Model Portfolio, followed by the name and symbol of the Charles Schwab ETF I selected to represent that portion of the portfolio. The second will present a summary of key data for each ETF, including data points such as the expense ratio and average spread, the current dividend yield, and the size and daily volume of the fund. Combined, these will give you, in one glance, a big picture overview of the expenses and returns, as well as some idea of the fund’s tradeability. In this fashion, when I have completed my articles for all three selected providers, you will be able to do some side-by-side comparisons if you wish. Finally, one by one, I will offer other comments and data for each ETF. So let’s get started. Here is the first table, presenting my ETF selections. Asset Class Weighting ETF Name Symbol Domestic Stocks (General) 30.00% Schwab U.S. Broad Market SCHB Domestic Stocks (High Dividend) 5.00% Schwab US Dividend Equity SCHD Foreign Stocks – Developed 20.00% Schwab International Equity SCHF Foreign Stocks – Emerging Markets 7.50% Schwab Emerging Markets Equity SCHE Foreign Stocks – Europe 5.00% SPDR STOXX Europe 50 FEU TIPS 15.00% Schwab U.S. TIPS SCHP Bonds 10.00% Schwab U.S. Aggregate Bond SCHZ REITS 7.50% Schwab U. S. REIT SCHH Here is the second table, presenting key data points. (click to enlarge) When comparing the ETF selections across all 3 providers that I am featuring in this series of articles, likely something that will immediately jump out at you is that Charles Schwab is extremely serious about its expense ratios. It beats Vanguard, long known themselves for rock-bottom expense ratios, on 7 of the 8 ETFs I have selected to fill out the portfolio. In my Fidelity article , I noted that BlackRock (NYSE: BLK ) temporarily held the title of “world’s cheapest ETF” when they lowered the expense ratio of ITOT to .03%. However, this did not last long as Charles Schwab responded almost immediately by cutting the expense ratio on SCHB to match. It is worth noting, however, that Vanguard is still the overall winner when it comes to size and tradeability. I look forward to seeing how the results play out as I track all 3 portfolios moving forward. Note: In view of Vanguard’s standing in the ETF field, I decided to use the Vanguard implementation as the lead, or reference, article for the three implementations. I will in some cases refer back to, and compare, the related Vanguard ETF when discussing the selections I make for the Fidelity and Charles Schwab implementations of the portfolio. With that overview in mind, let’s now take a look at each of the ETFs. Schwab U.S. Broad Market As noted, Charles Schwab recently dropped the expense ratio on this fund to .03%. At the same time, it is not quite as broad or deep as either the Vanguard Total Stock Market ETF (NYSEARCA: VTI ) or the iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA: ITOT ), in terms of complete market coverage. SCHB tracks the Dow Jones U.S. Broad Stock Market Index . Basically, this index includes the largest 2,500 stocks in the U.S. market, therefore excluding micro-caps and some small-caps. SCHB itself contains 2,070 holdings, a little more than half of VTI and ITOT. SCHB’s Top-10 holdings represent 14.4% of the total. At 1.93%, its distribution yield is right in line with VTI and just a little higher than ITOT. Viewed from a critical standpoint, then, this ETF could be considered slightly less of a genuinely “total market” fund than either of its competitors in my analysis. At the same time, its rock-bottom expense ratio combined with its substantial size and great tradeability make it a solid choice, particularly for the Schwab investor who can trade it commission-free. Schwab US Dividend Equity This ETF seeks to track the investment results of the Dow Jones U.S. Dividend 100 Index composed of relatively high dividend paying U.S. equities. As a result of using this index, it takes a little different approach than the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ). Whereas VYM contains 435 stocks, SCHD only contains 101. At the same time, I like how they are selected. The index screens both for a 10-year history of paying dividends as well as strong financial ratios. While this stringent process eliminates certain high-payers, and therefore drops the distribution yield a little bit, it leaves this ETF as a wonderful choice for conservative investors. Similar to VYM, REITs are excluded. However, sector allocations are somewhat different. For example, utilities comprise 7.6% of VYM, but only a scant 0.7% of SCHD. In contrast, industrials and information technology are more heavily weighted in SCHD. This holding is designed to help increase the level of income generated by the portfolio. Its 2.97% yield will act as a nice supplement to the 1.93% yield offered by SCHB, while SCHB should offer more opportunities for growth . My last note for this section is that you may have noticed that both SCHB and SCHD are tilted more toward large-caps, and a little more conservatively, that their competitors from both Vanguard and Fidelity. It will be interesting to watch their comparative returns in 2016. Schwab International Equity SCHF tracks the FTSE Developed ex U.S. Index . This index focuses on international large and mid-cap companies. As a result, it is not as broad an index as the one used by Vanguard for the Vanguard FTSE Developed Markets ETF (NYSEARCA: VEA ). This can be seen in the fact that this fund contains 1,217 holdings, as opposed to 1,866 for VEA. Interestingly, though, its Top-10 comprises 11.8% of its assets, only slightly higher than VEA’s 11.3%. Another little wrinkle is that its index includes both Canada as well as South Korea. Other providers tend to include South Korea under the “emerging market” umbrella. The combination of SCHF’s super-low .08% expense ratio, healthy asset base and great tradeability make it a rock-solid core for the international portion of any investor’s portfolio. Really, the only weakness that I can identify, when compared to its competitors in my analysis, is that it is a little light on exposure to smaller stocks. Schwab Emerging Markets Equity This is the counterpart to SCHF. This ETF invests in stocks of companies located in emerging markets around the world, such as China, India, Taiwan, and South Africa. Its goal is to closely track the return of the FTSE Emerging Index, very similar to the index tracked by the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ). As noted above, however, South Korea is included in SCHF, and is not included here. At the end of the day, for purposes of The ETF Monkey 2016 Model Portfolio, it will all work out the same, as South Korea is included one way or the other. Additionally, I could not find any evidence either in Schwab’s online materials or the prospectus for SCHE to the effect that China A-shares are included at the present time. This ETF currently contains 759 holdings, with the Top-10 comprising 21.10% of its assets. Similar to its counterpart SCHF, it focuses on large and mid-cap companies, not as much in smaller companies. It carries an expense ratio of .14%, the lowest of the 3 competitors. SPDR STOXX Europe 50 FEU was a bit of a tough choice. I was unable to find much from Schwab in terms of ETFs targeted specifically at Europe. Of the possibilities I evaluated, this was my favorite. FEU seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the STOXX Europe 50 Index . As that implies, it is not anywhere near as comprehensive as the competing offerings from Vanguard and Fidelity featured in my analysis. On the other hand, not only does it provide coverage of some of the largest and best companies in Europe, it crosses sectors well. Allow me to explain. The index does not simply look for the 50 largest companies in Europe. Here is how the prospectus explains it: The Index is designed to represent the performance of some of the largest companies across components of the 19 EURO STOXX Supersector Indexes. . . . The 50 companies in the Index are selected by first identifying the companies that equal approximately 60% of the free-float market capitalization of each [sector] . . . From that list, the 40 largest stocks are selected to be components of the Index. In addition, any stocks that are current components of the Index (and ranked 41-60 on the list) are included as components. In other words, the index ensures that all 19 sectors are represented, by the largest companies in each sector. Interestingly, the composition of the Top-10 ends up being quite similar to both the Vanguard FTSE Europe ETF (NYSEARCA: VGK ) and the iShares Core MSCI Europe ETF (NYSEARCA: IEUR ). It comes as no surprise, however, that they constitute a much larger percentage of the total; 37.19% for FEU vs. IEUR’s 15.83% and VGK’s 16.0%. With an expense ratio of .29%, it is also the priciest of the three competitors. However, the benefits of commission-free trading should offset that for Schwab investors. Schwab U.S. TIPS This ETF seeks to track an index that measures the performance of inflation-protected public obligations of the U.S. Treasury. Instead of comparing SCHP to Vanguard’s offering, as I have generally been doing in this series of articles, I am going to instead use the iShares TIPS Bond ETF (NYSEARCA: TIP ) as my reference point. In my opinion, to do any less would be to show disrespect to SCHP. Simply put, SCHP is a worthy competitor to TIP. Yes, it was launched in 2010, 7 years after TIP. Yes, it “only” has $813 million in AUM against TIP’s roughly $2 billion. But its rock-bottom .07% expense ratio, compared to .20% for TIP, has made it very popular with investors, leading to great acceptance and trading volume. In terms of the contents of the fund, they are almost identical to TIP. It contains 37 holdings, comparable to TIP’s 39, and comes in with an effective duration of 7.68 years, as opposed to 8.44 for TIP. Not surprisingly, SCHP’s dividend distribution of 1.93% is also very similar to TIP’s 1.98%. Long story short, this is a wonderful vehicle for any investor interested in the TIPS sector, and especially great for the Schwab investor who can trade commission-free. Schwab U.S. Aggregate Bond SCHZ tracks the Barclays Capital U.S. Aggregate Bond Index . With an inception date of 7/14/2011, SCHZ is both newer, and far smaller, than its two competitors in my 3 tracked portfolios. Its AUM of $2.05 billion compares against the Vanguard Total Bond Market ETF’s (NYSEARCA: BND ) $27.12 billion and the iShares Core U.S. Aggregate Bond ETF’s (NYSEARCA: AGG ) $30.38 billion. It also contains a smaller number of holdings; 2,612 as compared to 4,984 for AGG and 7,746 for BND. In terms of portfolio construction, SCHZ runs a little closer to AGG, having an effective duration of 5.26 years as compared to 5.36 years for AGG and 5.8 years for BND. Still, it offers broad market coverage and is a solid choice for buy-and-hold investors. Finally, at a puny .05%, it has the lowest expense ratio of the three. Schwab U.S. REIT SCHH tracks the Dow Jones U.S. Select REIT Index . SCHH has established itself as a formidable player in the REIT space. It does not contain as many holdings as either of its competitors in my analysis, with 100 holdings as opposed to the Vanguard REIT ETF’s (NYSEARCA: VNQ ) 154 holdings and the Fidelity MSCI Real Estate ETF’s (NYSEARCA: FREL ) 201 holdings. However, it still does a nice job of covering many different sectors; including Retail, Residential, Health Care, and Office REITS. With fewer holdings, it comes as no surprise that its largest holding, as well as its Top-10 holdings, are more heavily weighted than its competitors in my analysis. Simon Property Group (NYSE: SPG ), its single largest holding, carries a 9.9% weighting as opposed to 7.9% in VNQ and 6.39% in FREL, and its Top-10 holdings comprise a full 44.8 of its total as opposed to 35.9% in VNQ and 32.42% in FREL. At the same time, its expense ratio of .07% is by far the lowest of our 3 competitors, making it a solid holding for investors interested in holding a position in REITS. Summary and Conclusion So there you have them. The 8 ETFS that make up the Charles Schwab implementation of my portfolio. I have also written similar articles for both Vanguard and Fidelity, and will follow all 3 with an article that will begin the process of actually building and tracking the portfolios as of the closing price of all the components on December 31, 2015. Until then, I wish you . . . Happy investing!

Forget Dividend Growth Investing: I Want My Dividends And I Want Them Now

Summary In a previous article, I featured the Vanguard Dividend Appreciation ETF, and my reasons for including it in my personal portfolio. In this article, I feature a different ETF, one that you may select if you wish to receive a higher level of current income. In the course of this article, I will also examine the question: “Should I perhaps hold both in my portfolio?” Towards the end, I also offer a link that will give you a peek into my own portfolio. This article is designed to be read in conjunction with the most popular article I have managed to write to-date for Seeking Alpha, with over 7,750 web and mobile views and counting. In that article, I featured the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ). I explained why, after considering attempting to build a little 10-stock “mini ETF” of my own, I decided instead to add to my weighting in that particular ETF. While noting that VIG carried a rather modest SEC yield of 2.19%, I featured the structural reasons that one could expect this dividend to grow over time. But what if you are an investor who says: “Forget dividend growth! I want my dividends and I want them now!” As it happens, I have just the ETF for you. This article will discuss another Vanguard ETF that forms a piece of the “bedrock” of dividend income that supports my portfolio; namely the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ). When I say “read in conjunction with,” what I mean is that I will attempt not to bore the reader by repeating the information and concepts developed in that previous article, but rather expand on them, clarify similarities and differences between the two ETFs, and ultimately attempt to address the question: “Why might I want to have both ETFs in my portfolio?” Expense Ratio and Composition While, at times, other ETF providers make a wonderful marketing splash by being able, for example, to at least temporarily tout that they offer the world’s cheapest ETF , one of the things I admire about Vanguard is that it offers a wide variety of ETFs – including some that are specialized – at extremely low expense ratios. VYM is no exception. Like its stablemate VIG, its expense ratio is a mere .10%. In this case, what do you get for your .10%? Here’s a quick overview from VYM’s fact sheet on the Vanguard website: Right off the bat, then, we see that VYM tracks the FTSE High Dividend Yield Index and does so in passive fashion, using a full-replication approach. As it turns out, this index represents the U.S.-only component of the FTSE All-World High Dividend Yield Index . From the linked fact sheet, we find that: This index comprises stocks that are characterized by higher-than-average dividend yields. REITs are removed from this index, because they do not generally benefit from currently favorable tax rates on qualified dividends. Additionally, stocks forecast to pay a zero dividend over the next 12 months are also removed. Finally, the remaining stocks are ranked by annual dividend yield and included in the index until the cumulative market cap reaches 50% of the total market cap of the universe of stocks under consideration. The index is reviewed semi-annually, in March and September. Finally, the associated Vanguard Advisor’s page reveals that “buffer zones” are utilized during the annual rebalancing exercise, to reduce portfolio turnover. This index is a little broader than the one utilized for VIG. Currently, VIG contains 179 stocks, and VYM contains 435. The fund currently has $15.6 billion in Assets Under Management (AUM), with daily average trading of $43.41 million. It has an average trading spread of 0.02%. Finally, the fund’s current SEC yield is 3.14%. Comparing VYM With VIG. Should You Hold One? Both? In this section, I will expose the differences and similarities between VYM and VIG. Ultimately, it is my hope that it helps you to decide whether you would like to add one or the other to your portfolio or, like I do, maintain a target weighting in both. To help you conceptualize the differences, I first used the charting capabilities of Excel to visually display the differences in their sector breakdowns, with all percentages being taken directly from the Vanguard fact sheets. From that graphic, you likely noticed that VIG is much more heavily weighted in: Consumer Goods Consumer Services Industrials In contrast, VYM tends to feature: Financials Oil & Gas Telecommunications Utilities When it comes to Basic Materials, Healthcare, and Technology, the weightings are very similar. Next, have a look at the comparative Top-10 holdings of the two ETFs, to see how these themes play out in their largest holdings: There are perhaps two intuitive takeaways from this: VYM tends to feature what might be described as slightly “stodgier” companies. These are certainly not rapid growers. Rather they are established companies in low-growth businesses which deliver a large part of their earnings to shareholders in the form of dividends. VIG tends to feature companies with lower current payouts, but slightly faster growth. If you decide to include both in your portfolio, there is some overlap (3 similarly-weighted sectors, 3 stocks in the Top-10 holdings of both). However, it could be argued that there is a greater level of variance (3-4 sectors with very different exposure, 7 stocks which are not found in both Top-10 holdings). Let’s next turn to relative performance. In reviewing the comments from other Seeking Alpha articles, I have noticed some skepticism regarding dividend-paying stocks, and therefore related ETFs, on two fronts: In good times, they tend to underperform the S&P 500. Conversely, they often don’t hold up so well when the market experiences a sharp downturn. In that vein, you may find the following charts helpful to review. First, I started by laying both VIG and VYM against the S&P 500 index over the past 5 years. VYM data by YCharts Interestingly, I actually find VYM’s performance to be rather stunning. Though it has trailed the S&P 500 by roughly 6% over that time frame, as the next chart shows it has also consistently delivered a dividend in the range of 2.75-3.25%. In contrast, on both counts, VIG’s comparative performance over this period appears slightly underwhelming. VYM Dividend Yield (TTM) data by YCharts Next, though, let’s have a look at the last extended major downturn, covering the period between 10/1/2007 and the bottom on 3/9/2009: VYM data by YCharts In this drastic negative environment, VIG emerged as the clear winner, besting the S&P 500 by a full 8.5% and VYM by over 10%. However, again using the S&P 500 as our benchmark, VYM also held up comparatively well. Summary and Conclusion I am of the belief that dividends are an invaluable component of a solid, well-balanced portfolio. In my case, I have elected to maintain modest holdings in both AT&T (NYSE: T ) and Verizon (NYSE: VZ ) in my personal portfolio for the express purpose of having a solid foundation of dividends. The linked article also explains my rationale for not automatically reinvesting my dividends, and what I do instead. That is why VYM forms an integral part of my portfolio as well. Currently, it stands at 5.18%, augmenting my 7.22% weighting in VIG, for a total of 12.40% between the two ETFs. Should you hold both VYM and VIG in your portfolio? If you are interested in a steady stream of dividends while at the same time benefiting from both great diversification and a low expense ratio, I believe the above evidence suggests that you should. VYM offers a higher current dividend yield while VIG may offer both a little more growth as well as better protection in the event of a market downturn. As always, whatever your personal choices, I wish you. Happy investing!

Consider Adding Health Care To Your Winning Allocation: And The ETF To Do It

Summary Supplementing your core ETF portfolio with smart sector bets can lead to healthy returns. Powerful demographic and related trends make health care one such sector, and now may be a good time to get in. However, there are risks. A quality ETF can help to mitigate these. I share my suggestion as to the one you should choose. When building your ETF portfolio, it is good to start with the basics. In my previous work on Seeking Alpha, I have suggested a simple, yet powerful and globally-diversified portfolio based on just 3 ETFs . However, you may wish to enhance such a basic approach by supplementing it with ETFs targeted at certain sectors of the marketplace. REITs are one such possibility. In a follow-up article , I built a four-ETF variant of the base portfolio that includes REITS. For this article, however, let’s take a look at another sector in which you may want to make a targeted investment. I will also suggest that you use a specific ETF to do so. Why Health Care? Why Use an ETF? In my personal portfolio, I have chosen to add a targeted investment in the health care sector. Why? Please allow me to share just a couple of quick items I found when researching this topic. We have an aging population. Consider the following, from the Administration on Aging , part of the U.S. Department of Health and Human Services: The older population-persons 65 years or older-numbered 44.7 million in 2013 (the latest year for which data is available). They represented 14.1% of the U.S. population, about one in every seven Americans. By 2060, there will be about 98 million older persons, more than twice their number in 2013. People 65+ represented 14.1% of the population in the year 2013 but are expected to grow to be 21.7% of the population by 2040. Not surprisingly, with an aging population comes increased costs for health care. Consider two excerpts from a report on aging from the Centers For Disease Control : The increased number of persons aged > 65 years will potentially lead to increased health-care costs. The health-care cost per capita for persons aged > 65 years in the United States and other developed countries is three to five times greater than the cost for persons aged 65 years ($12,100), but other developed countries also spent substantial amounts per person aged > 65 years, ranging from approximately $3,600 in the United Kingdom to approximately $6,800 in Canada ( 13 ). However, the extent of spending increases will depend on other factors in addition to aging ( 12 ). The median age of the world’s population is increasing because of a decline in fertility and a 20-year increase in the average life span during the second half of the 20th century ( 1 ). These factors, combined with elevated fertility in many countries during the 2 decades after World War II (i.e., the “Baby Boom”), will result in increased numbers of persons aged > 65 years during 2010–2030 ( 2 ). Worldwide, the average life span is expected to extend another 10 years by 2050 ( 1 ). The growing number of older adults increases demands on the public health system and on medical and social services. Chronic diseases, which affect older adults disproportionately, contribute to disability, diminish quality of life, and increased health- and long-term-care costs. In summary, the reports reveal that, due to longer life spans, people often live longer with chronic disease. Sadly, factors such as obesity and diabetes, more and more common in our culture, also lead to greater need for medications and other health care support. Finally, technological advances are making possible the treatment of certain conditions that simply could not have been treated in the past Certainly, factors such as these bode well for the long-term outlook for health-care related products and services. At the same time, investment in the health care sector is not without its risks. For example, pharmaceutical companies must spend vast amounts on R&D to develop and bring new drugs to market. But getting a drug to market is no small task. To begin with, it is a real challenge to identify and develop new chemical compounds for such drugs. And even once a potential drug is developed, it must go through rigorous clinical trials before it is approved for sale to the public. Needless to say, not all drugs make it through this process. This is where the ability to use an ETF to invest in health care can be, well, good for your investment health. I will get into the specifics of our focus ETF as it relates to this matter in just a little bit. Why Now? I have been hoping to write an article on this topic for some time. Why did I choose to do so now? The impetus actually came from this news item right here on Seeking Alpha. I won’t bother recapping it; it is short and you can read it for yourself. But here is a picture that will make very evident what the quoted analyst was getting at. VHT data by YCharts The blue line represents the Vanguard Health Care ETF (NYSEARCA: VHT ), the focus of our article. The yellow line represents the broader S&P 500 index. As can be seen, there was a roughly 12% gap between the performance of this index and the S&P 500 just a little earlier this year. Due in large part to recent concerns having to do with the biotech sector, that YTD gap has narrowed to a mere 1.2%. As the quoted analyst suggests, this may offer a good opportunity to either enter, or add to your position in, this sector. The Power of VHT Earlier, I briefly touched on some of the risks involved in investing in the health care sector and suggested using an ETF to mitigate such risk. Simply put, this is because a well-chosen ETF will allow you to remain well diversified, thus lessening single-company risk. As alluded to earlier, in this article I chose to focus on the Vanguard Health Care ETF. This ETF is based on the MCSI US Investable Market Health Care 25/50 Index . Let’s start with a closer look at that index, in the below picture taken from the factsheet for the index. (click to enlarge) Here are a few things worthy of note: There are 349 constituents, or companies, in the index. The Top-10 holdings comprise some 44.96% of the overall index, and are mostly large-cap pharmaceutical companies. This is also reflected in the overall 36.58% weighting of pharmaceuticals in the index (see pie chart). However, this risk is somewhat balanced by the inclusion of McKesson Corp. (NYSE: MCK ) and similar companies involved in the distribution of health care products, and UnitedHealth Group (NYSE: UNH ) and similar companies involved in healthcare services. This diversifies your risk, as the pie chart shows, across various sub-industries within the overall health sector. If you look at the Portfolio and Management tab of the factsheet for VHT, you will notice that this ETF is extremely faithful in tracking this index. Vanguard supplements this with a rock-bottom expense ratio of .12%. The fund’s total net assets of $6.1 billion and average daily trading volume of $58.37 million mean that the fund is extremely liquid, leading to a low .07% trading spread (the average difference between “buy” and “sell” transactions). I would hope you hold this ETF for the long term, but the above figures will hold you in good stead should you need to trade. Finally, VHT carries a 1.45% distribution yield, which Vanguard recently shifted from being an annual distribution to a quarterly distribution, which I really love. Summary and Conclusion I believe health care is a great sector in which to make a targeted investment. In this article, I have recommended using an ETF to do so, and featured the Vanguard Health Care ETF as what I believe to be your best tool to do so. This excellent choice gives you tremendous diversity across the sector, coupled with a low expense ratio and great liquidity. Happy investing!