In June, Schwab announced reducing expenses for their proprietary ETFs. This, along with recently announced commission free ETF trading from Schwab, Vanguard and Fidelity, represents an important and promising trend for ETFs in portfolio building. The following is the comparison among similar ETFs from Schwab, Vanguard and iShares.
|Schwab U.S. Broad Market ETF||SCHB (0.06%)||VTI (0.07%)||IWV(0.21%)|
|Schwab U.S. Large-Cap ETF||SCHX (0.08%)||VV (0.12%)||IVV (0.09%)|
|Schwab U.S. Large-Cap Growth ETF||SCHG (0.13%)||VUG (0.14%)||IVW (0.18%)|
|Schwab U.S. Large-Cap Value ETF||SCHV (0.13%)||VTV (0.14%)||IVE (0.18%)|
|Schwab U.S. Small-Cap ETF||SCHA (0.13%)||VB (0.14%)||IJR (0.20%)|
|Schwab International Equity ETF||SCHF (0.13%)||VEA (0.14%)||EFA (0.35%)|
|Schwab International Small-Cap Equity ETF||SCHC (0.35%)||VSS (0.40%)||SCZ (0.40%)|
|Schwab Emerging Markets Equity ETF||SCHE (0.25%)||VWO (0.27%)||EEM (0.72%)|
So far, Schwab ETFs are all equity (stock) index based funds that include U.S. stocks, international stocks and emerging market equity. Compared with iShares or even Vanguard, Schwab has been late in the game and their ETFs have short history. However, Schwab has a relatively good record in their mutual funds that are managed using quantitative models. That experience using quantitative models in their portfolio management certainly can help their ETF management. Ultimately, what it really matters for investors are the total returns of ETFs that reflect both expenses (taken out from asset under management, usually monthly) and fund performance before fee. The following is the total annualized return table for ETFs from Schwab, Vanguard and iShares up to 7/23/2010. All performance data are calculated from Schwab ETFs’ inception date.
|Schwab U.S. Broad Market ETF (inception 11/03/2009)||SCHB (11.78%)||VTI (11.09%)||IWV(11.9%)|
|Schwab U.S. Large-Cap ETF (inception 11/03/2009)||SCHX (10.57%)||VV (9.54%)||IVV (9.37%)|
|Schwab U.S. Large-Cap Growth ETF (inception 1/4/2010)||SCHG (-4.23%)||VUG (-4.72%)||IVW (-5.81%)|
|Schwab U.S. Large-Cap Value ETF (inception 12/15/2009)||SCHV (1.48%)||VTV (1.06%)||IVE (0.5%)|
|Schwab U.S. Small-Cap ETF (inception 11/03/2009)||SCHA (23.92%)||VB (23.25%)||IJR (22.08%)|
|Schwab International Equity ETF (inception 11/03/2009)||SCHF (-0.01%)||VEA (-2.25%)||EFA (-4.03%)|
|Schwab International Small-Cap Equity ETF (inception 1/14/2010)||SCHC (-9.51%)||VSS (-8.43%)||SCZ (-11.14%)|
|Schwab Emerging Markets Equity ETF (inception 1/14/2010)||SCHE (-3.09%)||VWO (-2.49%)||EEM (-5.77%)|
From their short history, it is very impressive that almost all of Schwab ETFs deliver better or no worse total returns: all Schwab ETFs outperform their iShares counterparts while, compared with Vanguard, only SCHE (emerging mkt equity) and SCHC (international small cap) slightly underperform Vanguard VWO and VSS respectively. Coupled with commission free trades for these ETFs, Schwab ETFs are very enticing for investors. The main drawback, however, is that Schwab does not offer ETFs in other major asset classes, especially in fixed income (it was reported that Schwab will soon provide fixed income ETFs). To build an effective portfolio, investors are forced to use other ETFs to cover missing major asset classes such as fixed income. Schwab charges $8.95 per trade for ETFs provided by other parties.
MyPlanIQ maintains Schwab Commission Efficient ETFs Plan. Since Schwab's ETFs only cover Domestic and International Equities, the additional ETFs are used to include other major asset classes including US REIT (NYSEARCA:IYR), Global REIT (NYSE:IGR), Commodities (DBC, GLD), International Bonds (NYSEARCA:BWX), Fixed Incomes and Long/Intermediate/Short US Treasury Bonds (TLT, IEI, SHY) and High Yield Junk Bond (NYSEARCA:JNK). These additional ETFs are not commission free in a Schwab brokerage account. The strategic and tactical asset allocation moderate portfolios have the following performance:
|1 Yr Annual Return||3 Year Annual Return||5 Year Annual Return|
|Strategic Asset Allocation Moderate||20%||0%||3%|
|Tactical Asset Allocation Moderate||4%||5%||6%|
In conclusion, like Vanguard ETFs, Schwab proprietary ETFs offer compelling values for portfolio building: low cost and commission free. To make their ETFs widely usable and competitive to iShares, however, Schwab (as well as Vanguard) needs to help to increase trading volume for these ETFs so that the tracking errors/friction could be reduced. This is perhaps the major important remaining obstacle for these ETFs to become staples for portfolios.
Disclosure: long IYR, TLT