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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! Scalper1 News
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