Robo advisors — or as Schwab likes to call them, automated investing services — have become popular in the past few years.
Schwab of course has an edge in that it's part of the larger Charles Schwab family. This gives you the opportunity for all-inclusive investing. But how does it work? I took it for a test-drive to find out.
What Is Schwab Intelligent Portfolios?
Similar to other popular robo advisors, Schwab Intelligent Portfolios is a professionally managed, fully automated investment portfolio. Your portfolio will be allocated based on your risk profile, ranging from conservative to moderate, to aggressive. The portfolio will be rebalanced daily as necessary. Tax-loss harvesting is available on accounts with a minimum balance of $50,000.
In addition to Schwab Intelligent Portfolios, you will be able to take advantage of all the investment options that are available through Charles Schwab. The company is a full-service discount brokerage firm and one of the largest in the world. It has almost $3 trillion in client assets under management.
It offers a virtually unlimited selection of investments, including exchange-traded funds (ETFs), mutual funds, bonds and other fixed-income investments, options, real estate investment trusts (REITs) and commodity-based investments. Stocks and options can be traded at just $4.95 per trade, which is one of the lowest commissions in the industry.
It's possible to have Schwab Intelligent Portfolios managed for you while also maintaining a self-directed portfolio with the same broker.
How Does Schwab Intelligent Portfolios Work?
You can open an account with as little as $5,000. You begin by completing a questionnaire that includes 12 questions that help to establish your investment risk profile, time horizon and investing goals.
Your portfolio will be comprised of as many as 20 individual ETFs. These include stocks and fixed-income investments. But Schwab also adds a few investment allocations that are not typical of robo advisors. These include real estate, precious metals, bank loans and even master limited partnerships (MLPs). Schwab Intelligent Portfolios also includes a cash component, which will be based on your investment profile.
Since Charles Schwab has its own line of ETFs, some will be included in your portfolio, along with the funds of other fund families.
Charles Schwab Intelligent Portfolios Features
|Tax Loss Harvesting|
Monthly, Bimonthly and Quarterly
|Customer Service||Phone: 24/7; Live Chat: 24/7; Email|
As noted above, one of the biggest advantages with Schwab Intelligent Portfolios is being part of the Charles Schwab family. As one of the largest investment brokerages, Schwab offers everything you need to invest. The customer service is among the best in the industry. And it provides you with full access to investment professionals, round the clock. The platform also has a wealth of educational resources and investment tools.
Some of the more specific benefits include:
Local Branches — Some investors like face-to-face contact. Schwab has more than 300 branches in and around cities across the U.S.
No Fees — As in “no fees of any kind.” The only fee you'll pay is the operating expense ratio (OER) on the ETFs held in your portfolio. This fee is typical of all robo advisors and is paid through the funds themselves.
Schwab Intelligent Portfolios' operating expense ratios (OERs) range from 0.3% to 0.65%. The weighted average annual OER varies by portfolio type and looks like this:
- Conservative portfolio, 0.06%
- Moderate portfolio, 0.15%
- Aggressive portfolio, 0.20%
Account Protection — All accounts are protected by SIPC. SIPC insures the value of your account for up to $500,000, including $250,000 in cash. There is also FDIC coverage, also up to $250,000, for cash held in the Schwab Intelligent Portfolios Sweep Program.
Goals — With Schwab Intelligent Portfolios, you can set up specific investment goals. For example, you can invest for retirement or a vacation or to build long-term wealth. You can even set and adjust a target withdrawal amount that will provide you with sustainable income.
|Minimum to Open Account||$100,000||$0||$5,000|
|Advice Options||Automated, Human Assisted||Automated, Human Assisted||Automated|
|Socially Responsible Investing|
Schwab Intelligent Portfolios Model Portfolio
Schwab Intelligent Portfolios has a very different composition than that of typical robo investing portfolios. Most allocate your portfolio across no more than a dozen ETFs. The funds are primarily in stocks and bonds, with the stock funds representing the broadest indices. Schwab Intelligent Portfolios uses very specific stock allocations, then adds a few twists to the mix.
Schwab evaluates hundreds of different ETFs, reducing the number that it uses to construct portfolios down to just 53. Each individual portfolio holds approximately 20 of those ETFs.
As you'll see in the charts below, Schwab Intelligent Portfolios has two ETFs in each asset allocation, a primary and secondary. This is done to facilitate tax-loss harvesting. The process involves buying and selling similar funds within the same asset class.
The general asset class mix includes the following broad categories:
- Fixed income
The cash position is held in the Schwab Intelligent Portfolios Sweep Program, where it will earn money market rates of interest. It's FDIC insured for up to $250,000 per depositor. The cash allocation is determined by your risk profile, with the largest position being held by the most risk-averse investors.
Stock Portfolio Makeup
The stock allocation is made up of several sub allocations, including the following:
- US Large Company Stock
- US Small Company Stock
- International Developed Large Company Stock
- International Developed Small Company Stock
- International Emerging Markets
What's more, there are two allocations within each stock allocation. One is the general market index weighted by market capitalization. The second is the “fundamental” allocation of the same stock class. Schwab Intelligent Portfolios believes the combination of the two allocations to be preferred investing methodology.
The fundamental allocations invest in ETFs that screen and weight companies based on fundamental factors like sales, cash flow and dividends. This is also referred to as “smart beta” or “strategic beta.” But in practical terms, it's value investing — investing in stocks with strong fundamentals but out of favor with current investment strategies.
Fundamental index strategies tend to lag market cap indexes in general booms in the market or during times when large companies outperform smaller ones. But research has indicated that fundamental index strategies outperform market cap indexes over the long haul. That's because they overweight companies that are relatively cheap based on financial metrics. As well, they do well in markets that reward value stocks.
The ETFs that are included in Schwab Intelligent Portfolios include:
|Category||Primary ETF||Secondary ETF|
|US Large Company||SCHX — Schwab U.S. Large-Cap||VOO — Vanguard S&P 500|
|US Large Company — Fundamental||FNDX — Schwab Fundamental U.S. Large Company||PRF — PowerShares FTSE RAFI US 1000|
|US Small Company||SCHA — Schwab U.S. Small-Cap||VB — Vanguard Small-Cap|
|US Small Company — Fundamental||FNDA — Schwab Fundamental U.S. Small Company||PRFZ — PowerShares FTSE RAFI US 1500 Small-Mid|
|International Developed Large Company||SCHF — Schwab International Equity||VEA — Vanguard FTSE Developed Markets|
|International Developed Large Company — Fundamental||FNDF — Schwab Fundamental International Large Company||PXF — PowerShares FTSE RAFI Developed Markets ex-U.S|
|International Developed — Small Company||SCHC — Schwab International Small-Cap Equity||VSS — Vanguard FTSE All-World ex-US Small Cap|
|International Developed Small Company — Fundamental||FNDC — Schwab Fundamental International Small Company||PDN — PowerShares FTSE RAFI Developed Markets ex-U.S. Small-Mid|
|International Emerging Markets||SCHE — Schwab Emerging Markets Equity||IEMG — iShares Core MSCI Emerging Markets|
|International Emerging Markets — Fundamental||FNDE — Schwab Fundamental Emerging Markets Large Company||PXH — PowerShares FTSE RAFI Emerging Markets|
|US Exchange-Traded REITS||SCHH — Schwab U. S. REIT||USRT- iShares Core U.S. REIT|
|International Exchange-Traded REITS||VNQI — Vanguard Global ex-U.S. Real Estate||IFGL — iShares International Developed Real Estate|
|US High Dividend||SCHD — Schwab US Dividend Equity||VYM — Vanguard High Dividend Yield|
|International High Dividend||VYMI — Vanguard International High Dividend Yield||DWX — SPDR® S&P International Dividend|
|Master Limited Partnerships (MLPs)||MLPA — Global X MLP||ZMLP — Direxion Zacks MLP High Income|
Unusual Stock Allocations
In addition to the general stock allocations, Schwab Intelligent Portfolios adds a few sectors to the stock portion that you don't typically see with other robo advisors.
Real Estate Investment Trusts (REITs) — These are funds that invest in commercial real estate and large apartment complexes. They can invest in the properties themselves or in the mortgages that are secured by those properties. The funds trade on exchanges and must pay out 90% of their taxable income to their shareholders. REITs have a history of paying out high dividends, as well as being a hedge against inflation. They represent a solid diversification away from an all-stock portfolio and tend to do well in times of inflation.
High Dividend Stocks — Schwab Intelligent Portfolios includes these in the stock allocation in order to add income. High dividend stocks function as a growth-income component, providing both predictable income and stock price appreciation. As well, dividend paying stocks tend to have more stable prices and can reduce volatility in a portfolio.
Master Limited Partnerships (MLPs) — This is an allocation that you never find in other robo advisor portfolios. MLPs typically invest in real estate or the production, processing or transportation of oil, natural gas, coal and other commodities. This is another way that Schwab Intelligent Portfolios adds a commodity diversification to your portfolio.
MLPs are publicly traded on security exchanges, just like stocks. They provide high levels of income and, like REITs, they pay high dividends. And like high dividend stocks, they provide a growth-income component, combining steady income with growth potential. They tend to perform well during times of high commodity production, particularly oil and gas.
Fixed Income Portfolio Makeup
Schwab Intelligent Portfolios' fixed income allocation includes the following general categories:
- US Treasurys
- US Investment Grade Corporate Bonds
- US Securitized Bonds
- US Inflation Protected Bonds
- US Corporate High Yield
- International Developed Corporate Bonds
- International Emerging Markets Bonds
- Investment Grade Municipal Bonds
- Investment Grade California Municipal Bonds (for California residents)
Schwab Intelligent Portfolios departs from the usual allocation by adding two unique categories to its fixed income portfolio:
Preferred Securities — These are the preferred stock of major companies. These shares provide high dividends and the potential for price appreciation.
Bank Loans — Being tied to short-term interest rates, bank loans would likely be unaffected if long-term interest rates were to rise. They can be attractive in environments where short-term interest rates are rising.
The fixed income portfolio includes the following allocations:
|Category||Primary ETF||Secondary ETF|
|US Treasurys||SCHR — Schwab Intermediate-Term U.S. Treasury||VGIT — Vanguard Intermediate-Term Government Bond|
|US Investment Grade Corporate Bonds||SPIB — SPDR® Portfolio Intermediate Term Corporate Bond||VCIT — Vanguard Intermediate-Term Corporate Bond|
|US Securitized Bonds||VMBS — Vanguard Mortgage-Backed Securities||MBB — iShares MBS|
|US Inflation Protected Bonds||SCHP — Schwab U.S. TIPS||STIP — iShares 0-5 Year TIPS Bond|
|US Corporate High Yield Bonds||HYLB — Deutsche X-trackers USD High Yield Corporate Bond||SHYG — iShares 0-5 Year High Yield Corporate Bond|
|International Developed Country Bonds||BNDX — Vanguard Total International Bond||IGOV — iShares International Treasury Bond|
|International Emerging Markets Bonds||EBND — SPDR® Bloomberg Barclays Emerging Markets Local Bond||EMLC — VanEck Vectors JP Morgan EM Local Currency Bond|
|Preferred Securities||PSK — SPDR Wells Fargo Preferred Stock||PFF — iShares U.S. Preferred Stock|
|Bank Loans||BKLN — PowerShares Senior Loan||N/A|
|Investment Grade Municipal Bonds||VTEB — Vanguard Tax-Exempt Bond||SHM — – SPDR® Nuveen Bloomberg Barclays Short Term Muni Bond|
|Investment Grade California Municipal Bonds||PWZ — PowerShares California AMT-Free Muni Bond||CMF — iShares California AMT-Free Muni Bond|
Commodity Fund Addition
Schwab Intelligent Portfolios also includes a commodity fund, or more specifically gold and other precious metals. This allocation uses one of two funds:
- IAU — iShares Gold Trust (primary EFT)
- GLTR — ETFS Physical Precious Metals Basket (secondary ETF)
The precious metals allocation increases overall portfolio diversification and is considered to be a defensive strategy. That's because precious metals tend to perform well when financial assets decline. They are particularly successful in environments where inflation is increasing, the US dollar is falling or there is geopolitical unrest or widespread concern over the stability of the financial system. It's a countercyclical investment, and it can improve overall portfolio performance during times of financial instability.
Charles Schwab Intelligent Portfolios Screenshots
Charles Schwab Intelligent Portfolios Pros & Cons[table “proscons” not found /]
Schwab Intelligent Portfolios looks to be one of the best overall robo advisors available. The fact that Schwab Intelligent Portfolios comes with no fees is an obvious benefit. The typical fee range for robo advisors is 0.25% to 0.50%. This can significantly reduce a portfolio's performance over the long term.
But even more important is the very broad diversification offered. The portfolio seems to be oriented toward advancing in all types of markets. This is reflected by the inclusion of fundamental stock allocations, real estate investment trusts and precious metals, all of which have the potential to run counter to the investment mainstream. This can be an important advantage in a different type of market than the perpetual bull market we're experiencing right now.
The lone disadvantage is the relatively high initial investment requirement. At $5,000, new and small investors would be better served by opening an account with either Betterment, which has no minimum initial investment requirement, or Wealthfront, which requires only $500 up front.
But if you meet the minimum investment, Schwab Intelligent Portfolios is an excellent robo advisor choice.