Schwab Review – A Free Schwab Intelligent Portfolios Robo Advisor?

Schwab Review – A Free Schwab Intelligent Portfolios Robo Advisor 1
Schwab Review – A Free Schwab Intelligent Portfolios Robo Advisor 1

Charles Schwab, the creator of the popular discount stock broker, originally rocked the investment world by offering stock trades at a fraction of what traditional brokers were charging. Competition is good. In the following article we will do Schwab Review to show you all the PROS and CONS.

Schwab Review – Robo advisors — or as Schwab likes to call them, automated investing services — have become popular in the past few years.

Charles Schwab’s fee-free Intelligent Portfolios is competent and offers a wide range of its own ETFs. The service also offers tax-loss harvesting, which is a big plus. However, it might be a bit too pricey for new and small investors.

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.

Review 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.

Review Charles Schwab Intelligent Portfolios Fees & Features

Minimum Investment$5000
FeesNone
AccountsTaxable, Joint, Traditional IRA, Roth IRA, Rollover IRA, SEP IRA, SIMPLE IRA, Custodial
401(k) AssistanceNo
Tax Loss HarvestingYes
Portfolio RebalancingYes
Automatic DepositsMonthly, Bimonthly and Quarterly
AdviceAutomated
Smart BetaYes
Socially ResponsibleNo
Fractional SharesNo
AccessWeb-Based, iPhone App, Android App
Customer ServicePhone: 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 build long-term wealth. You can even set and adjust a target withdrawal amount that will provide you with a sustainable income.

Review 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:

  • Stocks
  • Fixed income
  • Commodities
  • Cash

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 favour 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.

Review The ETFs that are included in Schwab Intelligent Portfolios include:

CategoryPrimary ETFSecondary ETF
US Large CompanySCHX — Schwab U.S. Large-CapVOO — Vanguard S&P 500
US Large Company — FundamentalFNDX — Schwab Fundamental U.S. Large CompanyPRF — PowerShares FTSE RAFI US 1000
US Small CompanySCHA — Schwab U.S. Small-CapVB — Vanguard Small-Cap
US Small Company — FundamentalFNDA — Schwab Fundamental U.S. Small CompanyPRFZ — PowerShares FTSE RAFI US 1500 Small-Mid
International Developed Large CompanySCHF — Schwab International EquityVEA — Vanguard FTSE Developed Markets
International Developed Large Company — FundamentalFNDF — Schwab Fundamental International Large CompanyPXF — PowerShares FTSE RAFI Developed Markets ex-U.S
International Developed — Small CompanySCHC — Schwab International Small-Cap EquityVSS — Vanguard FTSE All-World ex-US Small Cap
International Developed Small Company — FundamentalFNDC — Schwab Fundamental International Small CompanyPDN — PowerShares FTSE RAFI Developed Markets ex-U.S. Small-Mid
International Emerging MarketsSCHE — Schwab Emerging Markets EquityIEMG — iShares Core MSCI Emerging Markets
International Emerging Markets — FundamentalFNDE — Schwab Fundamental Emerging Markets Large CompanyPXH — PowerShares FTSE RAFI Emerging Markets
US Exchange-Traded REITSSCHH — Schwab U. S. REITUSRT- iShares Core U.S. REIT
International Exchange-Traded REITSVNQI — Vanguard Global ex-U.S. Real EstateIFGL — iShares International Developed Real Estate
US High DividendSCHD — Schwab US Dividend EquityVYM — Vanguard High Dividend Yield
International High DividendVYMI — Vanguard International High Dividend YieldDWX — SPDR® S&P International Dividend
Master Limited Partnerships (MLPs)MLPA — Global X MLPZMLP — 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 payout 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:

CategoryPrimary ETFSecondary ETF
US TreasurysSCHR — Schwab Intermediate-Term U.S. TreasuryVGIT — Vanguard Intermediate-Term Government Bond
US Investment Grade Corporate BondsSPIB — SPDR® Portfolio Intermediate-Term Corporate BondVCIT — Vanguard Intermediate-Term Corporate Bond
US Securitized BondsVMBS — Vanguard Mortgage-Backed SecuritiesMBB — iShares MBS
US Inflation-Protected BondsSCHP — Schwab U.S. TIPSSTIP — iShares 0-5 Year TIPS Bond
US Corporate High Yield BondsHYLB — Deutsche X-trackers USD High Yield Corporate BondSHYG — iShares 0-5 Year High Yield Corporate Bond
International Developed Country BondsBNDX — Vanguard Total International BondIGOV — iShares International Treasury Bond
International Emerging Markets BondsEBND — SPDR® Bloomberg Barclays Emerging Markets Local BondEMLC — VanEck Vectors JP Morgan EM Local Currency Bond
Preferred SecuritiesPSK — SPDR Wells Fargo Preferred StockPFF — iShares U.S. Preferred Stock
Bank LoansBKLN — PowerShares Senior LoanN/A
Investment Grade Municipal BondsVTEB — Vanguard Tax-Exempt BondSHM — – SPDR® Nuveen Bloomberg Barclays Short Term Muni Bond
Investment Grade California Municipal BondsPWZ — PowerShares California AMT-Free Muni BondCMF — 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:

  1. IAU — iShares Gold Trust (primary EFT)
  2. 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.

Review Charles Schwab Intelligent Portfolios Screenshots

Schwab Intelligent Portfolios Performance Schwab Review – A Free Schwab Intelligent Portfolios Robo Advisor
Schwab Intelligent Portfolios Performance Schwab Review – A Free Schwab Intelligent Portfolios Robo Advisor
Schwab Intelligent Portfolios Goals Schwab Review – A Free Schwab Intelligent Portfolios Robo Advisor
Schwab Intelligent Portfolios Goals Schwab Review – A Free Schwab Intelligent Portfolios Robo Advisor
Schwab Intelligent Portfolios Portfolio Schwab Review – A Free Schwab Intelligent Portfolios Robo Advisor
Schwab Intelligent Portfolios Portfolio Schwab Review – A Free Schwab Intelligent Portfolios Robo Advisor

Review Schwab Pros & Cons

Pros

  • Free Service — No direct fees to you beyond the annual fees for the ETFs within your portfolio.
  • Tax-Loss Harvesting — Available for accounts larger than $50,000.
  • Option to Remove Three ETFs — A unique feature in this space, you can remove up to three ETFs in the model portfolio they create for you.
  • Most ETFs Are Charles Schwab — Most of the ETFs used are Charles Schwab and good if you like your investing all-inclusive.
  • Higher Level of Diversification — Schwab Intelligent Portfolios goes beyond the basic stock and bond allocations and includes fundamental stock positions, real estate, precious metals and other asset classes.
  • 24/7 Access to Investment Advisors — This feature is practically unknown in the robo-advisor universe, at least at this level of accessibility.
  • Local Branches — For those times when you absolutely need face-to-face contact.

Cons

  • Large Cash Allocation — Anywhere from 6% – 30% of your investments will be in cash earning zero interest. Over the long-term, the cash drag can significantly reduce your returns, and we question the ulterior motives.
  • Large Tilt to Small-Cap Stocks — A larger percentage compared to the competition is allocated toward small-cap stocks.
  • No Fractional Shares — The investments will round down to the nearest whole share when investing.
  • High Initial Investment — $5,000 may be a bit steep for new and small investors.

Schwab Review Summary

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 upfront.

But if you meet the minimum investment, Schwab Intelligent Portfolios is an excellent Robo advisor choice.