Schwab Offers ETF Portfolios

by on January 22, 2010 | ETFs Mentioned:

Charles Schwab is continuing its push into the ETF industry, recently introducing six new managed portfolios of ETFs available through a low cost fee-based portfolio advisory program. The managed accounts program will offer an efficient way for investors to immediately establish a well-diversified portfolio, each of which will be composed of up to 24 ETFs offering exposure to five broad asset classes. “Investors today are looking for more help managing the risk in their investments while striving for an appropriate level of return that helps them get the most out of their money,” said Ben Brigeman, Executive Vice President for Investor Services. “These portfolios provide highly sophisticated asset allocation and diversification – benefits that used to be available only to the few and at considerable cost – to a much wider segment of the public.”

The all-ETF portfolios will cover the entire spectrum of risk tolerance. Schwab’s Conservative Income Portfolio will allocate about 70% of assets to fixed income and 25% to cash, with only a 5% weighting in equities. At the other extreme is the Aggressive Growth Portfolio, which invests 95% in equities and puts the remainder in cash. The ETF portfolios include:

  • Conservative Income
  • Income With Growth
  • Balanced
  • Balanced With Growth
  • Growth
  • Aggressive Growth

While the broad asset class allocations for each portfolio (i.e., the mix between fixed income, equities, and cash) will be fixed, managers will have the ability to tweak holdings within each asset class by overweighting and underweighting certain sectors and regions. Each portfolio can hold anywhere between eight and 24 ETFs at any time.

The managed ETF portfolios will utilize both third-party ETFs and Schwab products, which currently consist of five domestic equity and three international products. Each risk category will actually have two ETF portfolios, including IRA and non-IRA accounts. Only third party ETFs will be included in IRA accounts, while non-IRA accounts will be a blend of funds offered by Schwab and its competitors.

Schwab built its brokerage and asset management businesses around low costs, so it’s no surprise that the fees on the managed ETF portfolios are competitive as well. Assets between the investment minimum of $100,000 and $500,000 will incur a management fee of 0.75%. The next $500,000 in assets will be charged 0.65%, and any assets over $1 million at 0.50%. Including program fees and fund expense ratios, the all-in fees are expected to range from approximately 101 basis points to 112 basis points.

Perfect Blend?

All ETF portfolios have been readily available for some time, as both iShares and XShares offer lines of target retirement date “funds of funds” that theoretically allow investors to construct retirement portfolios with a single ETF. These target date funds are designed to alter their risk profile as the relevant date approaches, shifting allocations from equities to fixed income. But these funds have been slow to gain traction, as the 13 ETFs in the ETFdb Category have aggregate assets of just over $200 million.

PowerShares also offers a line of ETFs that employ balanced (PCA), balanced growth (PAO), and growth (PTO) strategies by investing in other ETFs. The target allocations of these funds ranges from 60% equities/40% fixed income for PCA to 90% equities/10% fixed income for PTO. These ETFs have about $30 million in aggregate assets.

ETF Pro members have access to our line of all-ETF model portfolios, including moth long-term allocation guides and shorter-term themed strategies (if you’re not a Pro member yet, sign up for a free trial or read more here).

The new products from Schwab could be much more popular for several reasons. First, the all-ETF portfolios seemingly strike a good balance between active and passive management. The strict breakdown of fixed income and equities ensures discipline in the asset allocation process, but the ability of a manger to determine specific holdings within each broad grouping should be attractive to those investors hesitant to pursue a “set it and forget it” strategy with their nest egg. Instead of pure indexing, the portfolios are backed by experienced money managers from one of the industry leaders. Second, Schwab already has access to a massive customer base, a significant portion of which is presumably anxious to shift assets away from traditional mutual funds and into ETFs. As the initial success of the company’s own ETFs has shown, this can significantly accelerate the product adoption process.

Many latecomers to the ETF party have waded in gradually, but Schwab appears to be jumping in head first. The company had gathered nearly half a billion dollars in ETF assets through the end of 2009, thanks in large part to rock bottom expense ratios and commission free trading in Schwab accounts. The most recent move indicates that Schwab is working to position itself as one of the leaders in the all-ETF portfolio management space as well.

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Disclosure: No positions at time of writing.