In the growing field of robo-advisors, Charles Schwab is trying to augment and diversify returns through smart-beta exchange traded funds.
The Schwab Intelligent Portfolios allocates about 60% to Charles Schwab’s suite of alternatively weighted ETFs that utilize Research Affiliates’ fundamental indexing methodology, reports Jackie Noblett for Ignites.
David Koenig, chief investment strategist at Schwab Wealth Investment Advisory, argues that the large tilt toward smart beta in the Schwab Intelligent Portfolios provide a suitable alternative to actively managed strategies. [Schwab Puts a Personal Touch on Intelligent Portfolio Construction]
“We’re able to add an additional layer of diversity and potentially improve risk-adjusted returns over time, with allocations to fundamentally weighted index funds,” Koenig said in the Ignites article.
There are six Schwab fundamental ETF strategies. The Schwab Fundamental U.S. All Company ETF (NYSEArca: FNDB) includes components from the Russell 3000 Index. The Schwab Fundamental U.S. Large Company ETF (NYSEArca: FNDX) takes the the top companies that weight above 87.5% from the Russell 3000 Index. The Schwab Fundamental U.S. Small Company ETF (NYSEArca: FNDA) tracks the bottom companies that weight below 87.5% from the Russell 3000 Index. The Schwab Fundamental International Large Company ETF (NYSEArca: FNDF) includes companies with weights above 87.5% of the Russell Developed ex-U.S. Index. The Schwab Fundamental International Small Company ETF (NYSEArca: FNDC) takes companies with weights below 87.5% of the Russell Developed ex-U.S. Index. Lastly, the Schwab Fundamental Emerging Markets Large Company ETF (FNDE) holds companies with weights above 87.5% of the Russell Emerging Markets Index.
The six funds’ fundamental indexing methodology weights holdings by company sized based on adjusted sales, operating cash flow, and dividends plus buyback.
Investors have been receptive to the robo-advisory strategies, funneling $1.5 billion into the portfolios over the first six weeks after launch, with 20% of investors as new Schwab clients.
The addition of the smart-beta ETFs into the robo-advisory reflect the growing desire to diversify away from traditional market-capitalization-weighted indices. Schwab argues that a break away from the relationship between a stocks’ price and weighting in a portfolio impacts risk-adjusted returns over the long haul. For instance, the Russel Fundamental US Large Company Index has outperformed the standard Russel 1000 index by 62 basis points, with a slightly less volatile performance, since the fundamental index’s inception in February 2011.
Fundamental strategies provide the potential for alpha, and I think that’s where a lot of the appeal comes from,” Tony Davidow, vice-president at the Schwab Center for Financial Research, said in the article.
However, potential investors should be aware that smart-beta ETF strategies typically cost more than the traditional beta-index ETF. Schwab’s fundamental ETFs, though, are on the cheaper end of the spectrum, with expense ratios ranging from 0.32% to 0.48%. In contrast, U.S.-listed enhanced ETFs have an average expense ratio of 0.61%, according to XTF data.
For more information on smart beta funds, visit our smart beta category.
Max Chen contributed to this article.