ETFs continue to broaden their appeal both in terms of flexibility and low cost. With commission free ETFs, more money stays in the investor's pocket rather than disappearing in fees. In addition, while many of these ETFs have a 30 day minimum hold, this is ideal for long term investing when making changes more often than that can be counter productive.
Four companies offer commission free ETFs and we are going to compare the offerings in detail to determine which is likely to offer the best value to the investor.
In this article we are going to compare Schwab and TD Ameritrade.
Schwab (SCHW) is a relative late comer to the ETF party. They offer the fewest ETFs and the ETFs have the shortest history. They only provide their own ETF's commission free. However, Schwab has a huge network and powerful brand so we expect Schwab to be a significant player in the market.
Schwab ETF |
NEW Bond ETFs |
Schwab U.S. TIPS ETF™ |
Schwab Short-Term U.S. Treasury ETF™ |
Schwab Intermediate-Term U.S. Treasury ETF™ |
Domestic Equity ETFs |
Schwab U.S. Broad Market ETF™ |
Schwab U.S. Large-Cap ETF™ |
Schwab U.S. Large-Cap Growth ETF™ |
Schwab U.S. Large-Cap Value ETF™ |
Schwab U.S. Small-Cap ETF™ |
International Equity ETFs |
Schwab International Equity ETF™ |
Schwab International Small-Cap Equity ETF™ |
Schwab Emerging Markets Equity ETF™ |
Notable properties about the Schwab offering
The expense ratios are low
There are four asset classes with a good choice of funds
We would have liked to have seen more choices with other providers
We would have liked to have seen funds with a longer history
We would expect real estate to be added before long
We would expect more choices in the international and emerging market segments before long
As most of the funds are very new, it’s impossible to do real back testing with the funds. So we have selected a commission efficient portfolio that includes:
| Asset Class | Ticker | Name |
|---|---|---|
| LARGE VALUE | SCHV | Schwab U.S. Large-Cap Value ETF |
| LARGE BLEND | SCHX | Schwab U.S. Large-Cap ETF |
| LARGE BLEND | SCHB | Schwab U.S. Broad Market ETF |
| LARGE GROWTH | SCHG | Schwab U.S. Large-Cap Growth ETF |
| LARGE GROWTH | IWF | iShares Russell 1000 Growth Index |
| SMALL VALUE | IJS | iShares S&P SmallCap 600 Value Index |
| SMALL BLEND | SCHA | Schwab U.S. Small-Cap ETF |
| Small Growth | IJT | iShares S&P SmallCap 600 Growth |
| Foreign Large Blend | SCHF | Schwab International Equity ETF |
| FOREIGN SMALL/MID GROWTH | SCHC | Schwab International Small-Cap Eq ETF |
| DIVERSIFIED EMERGING MKTS | SCHE | Schwab Emerging Markets Equity ETF |
| Inflation-Protected Bond | TIP | iShares Barclays TIPS Bond |
| Intermediate Government | IEI | iShares Barclays 3-7 Year Treasury Bond |
| SHORT GOVERNMENT | SHY | iShares Barclays 1-3 Year Treasury Bond |
| Inflation-Protected Bond | SCHP | Schwab U.S. TIPS ETF |
| SHORT GOVERNMENT | SCHO | Schwab Short-Term U.S. Treasury ETF |
| Intermediate Government | SCHR | Schwab Intermediate-Term U.S. Trsy ETF |
| LARGE VALUE | VTV | Vanguard Value Index |
| LARGE BLEND | VTI | Vanguard Total Stock Market ETF |
| LARGE VALUE | VTV | Vanguard Value ETF |
| DIVERSIFIED EMERGING MKTS | VWO | Vanguard Emerging Markets Stock ETF |
| Foreign Small/Mid Value | SCZ | iShares MSCI EAFE Small Cap Index |
| Foreign Large Blend | EFA | iShares MSCI EAFE Index |
As of Oct 15, 2010, the Schwab ETF investment choice is rated as average based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are. It has the following detailed ratings:
Diversification -- Rated as below average (19%)
Fund Quality -- Rated as average (59%)
Portfolio Building -- Rated as average (41%)
Overall Rating: average (40%)
The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA , both provided by MyPlanIQ).
For comparison purposes, we also include the moderate model portfolios of a typical five asset SIB (Simpler Is Better) plan. This SIB plan has the following candidate index funds and their ETF equivalent:
Fixed Income:(AGG or BND)
Foreign Equity:(EFA or VEU)
Emerging Market Equity:(EEM or VWO)
US Equity:(SPY or VTI)
Performance chart (as of Oct 15, 2010)
click to enlarge
Performance table (as of Oct 15, 2010)
Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
Four Core Asset ETF Index Funds Emerging Markets Tactical Asset Allocation Moderate | 2% | 17% | 6% | 44% | 14% | 88% |
Schwab Commission Efficient ETFs SGN Tactical Asset Allocation Moderate | 1% | 10% | 5% | 38% | 12% | 88% |
Schwab Commission Efficient ETFs SGN Strategic Asset Allocation Moderate | 10% | 71% | 1% | 2% | 9% | 40% |
Four Core Asset ETF Index Funds Emerging Markets Strategic Asset Allocation Moderate | 10% | 76% | 1% | 4% | 8% | 37% |
The Schwab Funds perform adequately against the SIBs.
TD Ameritrade (AMTD) are also newcomers to the ETF space offering 100+ commission free ETFs. The main restriction is that customers have to hold these ETFs for more than 30 days to make such trades ecommission free.
This is an almost ideal platform for retirement investing with a 30 day redemption period. With a web based application to monitor all of the funds in the plan, it should be possible to put together a very solid portfolio and deliver excellent results.
These funds provide exposure to 6 major assets: Emerging Market Equity, Foreign Equity, Fixed Income, US Equity, Commodity, Real estate.
The list of minor asset classes covered:
COMMODITIES BROAD BASKET: GSG, DBC
Conservative Allocation: AOK
DIVERSIFIED EMERGING MKTS: EEM, GMM, PXH, DEM, SCHE
Emerging Markets Bond: PCY
EQUITY: VTI, VT
EUROPE STOCK: IEV, VGK, PEF, DEB
Foreign Large Blend: EFA, VEU, GWL, PFA
Foreign Large Growth: EFG
Foreign Large Value: EFV, PID, DWM
FOREIGN SMALL/MID GROWTH: IFSM, VSS, SCHC
Foreign Small/Mid Value: SCZ
Global Real Estate: IFGL, RWX
High Yield Bond: HYG, JNK, PHB
Inflation-Protected Bond: TIP
Intermediate Government: IEI, VGIT, ITE
Intermediate-Term Bond: AGG, CIU, BIV, BND
JAPAN STOCK: EWJ, JPP, PJO, DXJ
LARGE BLEND: IVV, IYY, IWV, VTI, VV, SPY, DLN, RSP, SCHX
LARGE GROWTH: IVW, IWZ, JKE, VUG, ELG, QQQQ, RPG, SCHG
LARGE VALUE: IVE, IWW, JKF, VTV, ELV, PWV, RPV, SCHV
Latin America Stock: ILF, GML
LONG GOVERNMENT: TLT, TLH, IEF, EDV, VGLT, TLO, PLW
Long-Term Bond: CLY, LQD, BLV, VCLT
MID-CAP BLEND: IJH, IWR, JKG, VO, MDY, EMM, PJG, DON, EZM, MVV
Mid-Cap Growth: IJK, IWP, VOT, EMG, PWJ, RFG, UKW
MID-CAP VALUE: IJJ, IWS, JKI, VOE, EMV, PWP, RFV, UVU
Moderate Allocation: AOM
Multisector Bond: AGG, GBF, BND, LAG
Muni National Interm: ITM
Muni National Long: MUB, TFI, PZA, MLN
Muni National Short: SUB, SHM, PVI, SMB
PACIFIC/ASIA EX-JAPAN STK: EPP, AAXJ, GMF, PAF, DND
REAL ESTATE: IYR, ICF, VNQ
SHORT GOVERNMENT: SHY, SHV, VGSH, PLK, USY
Short-Term Bond: CSJ, BSV, VCSH
SMALL BLEND: IJR, IWM, JKJ, VB, DSC, PJM, DES, SAA, UWM, SCHA
Small Growth: IJT, IWO, JKK, VBK, DSG, PWT, RZG, UKK
SMALL VALUE: IJS, IWN, JKL, VBR, DSV, PWY, RZV, UVT
SPECIALTY-REAL ESTATE: RWR, PSR, URE
World Allocation: AOR, AOA
WORLD BOND: IGOV, BWX, WIP
WORLD STOCK: IOO, VT
As of Oct 15, 2010, this plan investment choice is rated as above average based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are . It has the following detailed ratings:
Diversification -- Rated as great (97%)
Fund Quality -- Rated as below average (28%)
Portfolio Building -- Rated as great (90%)
Overall Rating: above average (73%)
The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA , both provided by MyPlanIQ).
For comparison purpose, we also include the moderate model portfolios of a typical five asset SIB (Simpler Is Better) plan. This SIB plan has the following candidate index funds and their ETFs equivalent:
REITs: (IYR or VNQ or ICF)
Fixed Income: (AGG or BND)
Commodity: (DBC)
Foreign Equity: (EFA or VEU)
Emerging Market Equity: (EEM or VWO)
US Equity: (SPY or VTI)
Performance chart (as of Oct 15, 2010)
Performance table (as of Oct 15, 2010)
Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
TD Ameritrade Commission Free ETFs Tactical Asset Allocation Moderate | 13% | 87% | 13% | 86% | 20% | 128% |
TD Ameritrade Commission Free ETFs Strategic Asset Allocation Moderate | 10% | 83% | -1% | -6% | 9% | 46% |
10% | 65% | 9% | 66% | 17% | 114% | |
11% | 84% | 2% | 9% | 9% | 42% |
Currently, asset classes in REITs (IYR, VNQ, ICF) , Fixed Income (AGG, BND) and Emerging Market Equity (EEM, VWO) are doing relatively well. These asset classes are available to TD Ameritrade Commission Free ETFs participants.
Portfolio Performance Comparison
Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
TD Ameritrade Commission Free ETFs Tactical Asset Allocation Moderate | 13% | 87% | 13% | 86% | 20% | 128% |
Schwab Commission Efficient ETFs SGN Tactical Asset Allocation Moderate | 1% | 10% | 5% | 38% | 12% | 88% |
TD Ameritrade Commission Free ETFs Strategic Asset Allocation Moderate | 10% | 83% | -1% | -6% | 9% | 46% |
Schwab Commission Efficient ETFs SGN Strategic Asset Allocation Moderate | 10% | 71% | 1% | 2% | 9% | 40% |
In this round, TD Ameritrade is the clear winner with tactical asset allocation while the Schwab SAA pretty much matches its counterpart.
TD Ameritrade's two key advantages are:
A large number of ETFs in six asset classes to allow the construction of high performance portfolios
Providing ETFs with history from industry leading suppliers
TD Ameritrade is the clear winner and moves on to the final round.
Disclosure: No positions
