Introduction
A foundational belief that underlies Schwab Intelligent Portfolios®is that investors should be well diversified, both within and across asset classes. Within the program, any portfolio may contain up to 20 expanded asset classes, along with an FDIC-insured cash allocation. That begs the question, what is an asset class?
It's not an entirely precise concept. Generally speaking, an asset class is a group of investments such as stocks and bonds that can be further broken down by characteristics such as market capitalization and level of risk. Like so many definitions, though, the technical terms can only do so much. Examples bring the term to life far more powerfully.
This document is a guide to the asset classes that are present in at least one of the portfolios that comprise Schwab Intelligent Portfolios. In addition to describing the investments that are included in each asset class, we've highlighted the role each plays in a portfolio and when they tend to perform well and poorly.
This white paper also includes a list of the exchange-traded funds (ETFs) selected for each asset class within Schwab Intelligent Portfolios. ETFs are selected based on stringent criteria to ensure that all ETFs within the program—whether Schwab ETFs™ or third-party ETFs—deliver accurate asset class representation with low costs. These selection criteria include characteristics such as assets under management (AUM), ETF liquidity, how closely the ETF tracks its underlying index, operating expense ratio (OER), and other criteria.
Schwab Intelligent Portfolios are designed to be low cost and range in weighted average overall ETF OERs at the portfolio level from 0.02% to 0.19%.
These selection criteria help pare down more than 3,000 ETFs to the 51 included in the program that could potentially be part of your Schwab Intelligent Portfolios account. Most asset classes include two ETFs, a primary ETF and a secondary ETF. To enable tax-loss harvesting1within asset classes, the primary and secondary ETFs selected for the program track different underlying indexes.2Along with the name and ticker symbol for each of the 51ETFs included in the program, this document provides details on why each ETF was selected for inclusion and why other ETFs were not selected.
Charles Schwab Investment Management, Inc. (CSIM) periodically reviews and updates the selected ETFs in our portfolios. All ETF data shown in this paper is as of February 28, 2023, to coincide with the last review process.
Guide to Expanded Asset Classes
Stocks
- U.S. Large Company Stocks
- U.S. Large Company Stocks–Fundamental
- U.S. Small Company Stocks
- U.S. Small Company Stocks–Fundamental
- International Developed Large Company Stocks
- International Developed Large Company Stocks–Fundamental
- International Developed Small Company Stocks
- International Developed Small Company Stocks–Fundamental
- International Emerging Markets Stocks
- International Emerging Markets Stocks–Fundamental
- U.S. Exchange-Traded REITs
- International Exchange-Traded REITs
- U.S. High Dividend Stocks
- International High Dividend Stocks
Fixed Income
- U.S. Treasuries
- U.S. Investment Grade Corporate Bonds
- U.S. Securitized Bonds
- U.S. Inflation Protected Bonds
- U.S. Corporate High Yield Bonds
- International Developed Country Bonds
- International Emerging Markets Bonds
- Preferred Securities
- Bank Loans
- Investment Grade Municipal Bonds
- Investment Grade California Municipal Bonds
Commodities
- Gold and Other Precious Metals
Cash
- FDIC-insured Cash
ETF List (As of 3/31/2023)
| Category | Primary ETF | Secondary ETF |
|---|---|---|
| U.S. Large Company | SCHX–Schwab U.S. Large-Cap | VOO–Vanguard S&P 500 |
| U.S. Large Company–Fundamental | FNDX–Schwab Fundamental U.S. Large Company | PRF–Invesco FTSE RAFI U.S. 1000 |
| U.S. Small Company | SCHA–Schwab U.S. Small-Cap | VB–Vanguard Small-Cap |
| U.S. Small Company–Fundamental | FNDA–Schwab Fundamental U.S. Small Company | PRFZ–Invesco FTSE RAFI U.S. 1500 Small-Mid |
| International Developed Large Company | SCHF–Schwab International Equity | VEA–Vanguard FTSE Developed Markets |
| International Developed Large Company–Fundamental | FNDF–Schwab Fundamental International Large Company | PXF–Invesco FTSE RAFI Developed Markets ex-U.S. |
| International Developed–Small Company | SCHC–Schwab International Small-Cap Equity | VSS–Vanguard FTSE All-World ex-U.S. Small Cap |
| International Developed Small Company–Fundamental | FNDC–Schwab Fundamental International Small Company | PDN–Invesco FTSE RAFI Developed Markets ex-U.S. Small-Mid |
| International Emerging Markets | SCHE–Schwab Emerging Markets Equity | IEMG–iShares Core MSCI Emerging Markets |
| International Emerging Markets–Fundamental | FNDE–Schwab Fundamental Emerging Markets Large Company | PXH–Invesco FTSE RAFI Emerging Markets |
| U.S. Exchange-Traded REITS | SCHH–Schwab U.S. REIT | USRT–iShares Core U.S. REIT |
| International Exchange-Traded REITS | HAUZ–Xtrackers International Real Estate | VNQI–Vanguard Global ex-U.S. Real Estate |
| U.S. High Dividend | SCHD–Schwab U.S. Dividend Equity | VYM–Vanguard High Dividend Yield |
| International High Dividend | HDEF–Xtrackers MSCI EAFE High Dividend Yield Equity ETF | VYMI–Vanguard International High Dividend Yield |
| Category | Primary ETF | Secondary ETF |
|---|---|---|
| U.S. Treasuries | SCHR–Schwab Intermediate-Term U.S. Treasury | IEI–iShares 3-7 Year Treasury Bond |
| U.S. Investment Grade Corporate Bonds | SCHI–Schwab 5-10 Year Corporate Bond | SPIB–SPDR® Portfolio Intermediate Term Corporate Bond |
| U.S. Securitized Bonds | VMBS–Vanguard Mortgage-Backed Securities | MBB–iShares MBS |
| U.S. Inflation Protected Bonds | SCHP–Schwab U.S. TIPS | SPIP–SPDR Portfolio TIPS |
| U.S. Corporate High Yield Bonds | HYLB–Xtrackers USD High Yield Corporate Bond | USHY–iShares Broad USD High Yield Corp Bond |
| International Developed Country Bonds | IAGG–iShares Core International Aggregate Bond | BNDX–Vanguard Total International Bond |
| International Emerging Markets Bonds | EBND–SPDR® Bloomberg Emerging Markets Local Bond | EMLC–VanEck J.P. Morgan EM Local Currency Bond |
| Preferred Securities | PFFD–Global X U.S. Preferred | PSK–SPDR ICE Preferred Securities |
| Bank Loans | BKLN–Invesco Senior Loan | N/A |
| Investment Grade Municipal Bonds | VTEB–Vanguard Tax-Exempt Bond | MUB–iShares National Muni Bond ETF |
| Investment Grade California Municipal Bonds | CMF–iShares California Muni Bond | PWZ–Invesco California AMT-Free Muni Bond |
| Category | Primary ETF | Secondary ETF |
|---|---|---|
| Gold and Other Precious Metals | IAU–iShares Gold Trust | GLTR–abrdn Physical Precious Metals Basket Shares |
Stocks
U.S. Large Company Stocks
- What is it?
U.S. large company stocks are publicly traded equities issued by the largest companies domiciled in the United States. Most traditional stock indexes are constructed based on a market-capitalization-weighted ("market cap") approach (e.g., S&P 500®, Russell 1000®, etc.), in which companies with the largest market caps have the largest weights. Market cap is the most common measurement of a company's size, and is computed by taking the number of outstanding shares and multiplying it by the price of the stock. U.S. large company stocks are one of the most widely recognized and liquid asset classes, and are commonly viewed as a key building block to any diversified portfolio. Some of the more well-known, publicly traded corporations included in this asset class are older companies that have been around since the 19th century such as General Electric and Procter & Gamble, as well as much younger companies such as Alphabet and Facebook. - What role does it play in a portfolio?
U.S. large company stocks are meant to help provide growth to a portfolio. Many of these companies also provide income through the payment of dividends. - When does it perform well?
U.S. large company stocks typically perform well when underlying companies are growing and fundamentals are strong. When these companies are investing profits back into their businesses for research and development, personnel and technology, this can be a positive signal. Often, periods of strong U.S. large company growth happen simultaneously with strong overall economic growth and low inflation. Valuation matters, as well. When stock prices are low relative to earnings, for example, subsequent price performance is more likely to be strong. - When does it perform poorly?
These stocks perform poorly during economic slowdowns or expectations of such slowdowns and when interest rates are high. Unexpected inflation may also hurt these stocks. When prices are high relative to earnings, price performance can suffer. - ETF Selection
ETF Selection
- Name
- Ticker
- Operating Expense Ratio
-
Primary ETF
>
Name
Schwab U.S. Large-Cap
>
Ticker
SCHX
>
Operating Expense Ratio
0.03%
>
-
Secondary ETF
>
Name
Vanguard S&P 500
>
Ticker
VOO
>
Operating Expense Ratio
0.03%
>
Source: Morningstar Direct, as of 2/28/2023.
U.S. Large Company Stocks continued
- Why these ETFs were selected:SCHX and VOO had two of the lowest operating expense ratios among more than 100 U.S. large company stock ETFs at the time of ETF selection. Both funds have historically produced returns that consistently tracked their underlying indices closely. In addition, SCHX and VOO each had sizable assets under management (well above $30 billion)and have traded with tight average bid-ask spreads historically. While both funds reach slightly into the mid-cap space to provide additional diversification and potential for growth, their portfolios have historically been dominated by very large U.S. companies.
- Why other ETFs were not selected:SPDR®S&P 500 ETF (SPY) is the largest ETF in the Morningstar U.S. Fund Large Blend category (and the largest ETF period), and it has a history of trading with narrow bid-ask spreads. However, it has a higher expense ratio than our primary and secondary ETFs. Expense ratios are the most reliable component of total cost, and over a long-term holding period differences in bid-ask spread are less material than differences in operating expense ratio. CSIM also considers the potential impact to clients such as trading or other costs when selecting an ETF that would replace an existing ETF in the portfolios.
U.S. Large Company Stocks—Fundamental
- What is it?
U.S. large company stocks—fundamental are investments of larger U.S. companies that are included in fundamental indexes, which screen and weight companies based on fundamental factors such as sales, cash flow and dividends. Most traditional stock indexes are constructed based on market-cap (e.g., S&P 500®, Russell 2000®, etc.), where companies with the largest market capitalizations have the largest weights. Including allocations to fundamentally weighted indexes adds diversification within a portfolio andmay improve risk-adjusted returns over time. Due to their differences in construction, fundamentally weighted indexes tend to behave differently than market cap-weighted indexes in different market environments while retaining benefits of traditional indexing such as transparency and relatively low-cost implementation. - What role does it play in a portfolio?
Investments in fundamentally weighted ETFs and traditional market-cap weighted ETFs can be used as a complement to each other because they differ in their performance under various market environments. The end result is a portfolio that we believe will result in better risk-adjusted results over time. - When does it perform well?
Based on research conducted by Research Affiliates, LLC, FTSE Russell, and Schwab Center for Financial Research among others, fundamental index strategies have outperformed market-cap indexes over longer time periods. This is partly attributable to the fact that the fundamental strategies break the link of assigning a weighting with the price of the stock. A market-cap index provides the largest weighting to the largest companies regardless of valuation. As a result, market-cap indexes can be described as "overweighting over priced stocks and underweighting undervalued stocks."3Since fundamental index strategies tend to overweight companies that appear cheap based on various financial metrics, they tend to outperform in environments that reward such "cheap" aka value stocks. As for their absolute level of performance, fundamental strategies are affected in much the same way and by the same factors as U.S. large company stocks. - When does it perform poorly?
Fundamental index strategies may lag market-cap indexes in "boom" or "momentum" periods or when the biggest companies (as measured by market capitalization) dramatically outperform the smaller companies in an index. - ETF Selection
ETF Selection - U.S. Large Company Stocks—Fundamental
- Name
- Ticker
- Operating Expense Ratio
-
Primary ETF
>
Name
Schwab Fundamental U.S. Large Company
>
Ticker
FNDX
>
Operating Expense Ratio
0.25%
>
-
Secondary ETF
>
Name
Invesco FTSE RAFI U.S. 1000
>
Ticker
PRF
>
Operating Expense Ratio
0.39%
>
Source: Morningstar Direct, as of 2/28/2023.
U.S. Large Company Stocks—Fundamental continued
Why these ETFs were selected:Based on Morningstar classifications, two ETF providers offered ETFs in this category at the time of ETF selection. While there are many indexing approaches that incorporate various fundamental factors, classifications for fundamental strategies within Schwab Intelligent Portfolios are based on Morningstar's classification for index selection and index weighting (among other data points). From among the eligible funds in this asset class, FNDX had the lowest operating expense ratio at the time of ETF selection while meeting all other criteria. Both FNDX and PRF had sizable assets under management and have historically traded with relatively narrow bid-ask spreads.
Why other ETFs were not selected:The category consists of just two ETFs.
U.S. Small Company Stocks
- What is it?
U.S. small company stocks—or "small caps"—are investments in the equity of smaller U.S. companies, generally those that represent the bottom 10% of the market by cumulative market capitalization. Small company stocks may provide greater potential for growth than large company stocks. However, they are riskier because their size makes them more vulnerable to economic shocks, inexperienced management, competition and financial instability. - What role does it play in a portfolio?
The U.S. small company stocks offer higher growth potential than many other asset classes because of the potential for such companies to grow rapidly. Small cap stocks have higher expected long-term returns relative to other asset classes to compensate for the higher risk associated with them. - When does it perform well?
U.S. small company stocks generally perform well when the economy is expanding or investors expect such expansion to occur. Small company stocks tend to be more closely tied to the strength of the U.S. economy than large company stocks because they typically generate most of their revenue within the U.S. while large multinational companies often generate a substantial portion of revenue in multiple geographies around the world. Valuation matters as well. When prices are low relative to, for example, earnings, subsequent price performance is more likely to be strong. - When does it perform poorly?
During extreme equity market or economic stress, these stocks tend to perform poorly. When prices are high relative to earnings, price performance can suffer. - ETF Selection
ETF Selection - U.S. Small Company Stocks
- Name
- Ticker
- Operating Expense Ratio
-
Primary ETF
>
Name
Schwab U.S. Small-Cap
>
Ticker
SCHA
>
Operating Expense Ratio
0.04%
>
-
Secondary ETF
>
Name
Vanguard Small-Cap
>
Ticker
VB
>
Operating Expense Ratio
0.05%
>
Source: Morningstar Direct, as of 2/28/2023.
U.S. Small Company Stocks continued
- Why these ETFs were selected:SCHA and VB had operating expense ratios that were among the lowest for U.S. small company stock ETFs at the time of ETF selection. Both of these ETFs have historically traded with tight bid-ask spreads. Diversification is particularly important in the small cap market segment, and SCHA and VB each hold more than 1,200 small cap stocks. Many of the ETFs in this category have fewer than 600 holdings.
- Why other ETFs were not selected:Among other U.S. small company stock ETFs, iShares Russell 2000 (IWM) and iShares Core S&P Small-Cap (IJR) are both large, well-diversified ETFs that trade with tight bid-ask spreads. However, both had higher expense ratios at the time of ETF selection. CSIM also considers the potential impact to clients such as trading or other costs when selecting an ETF that would replace an existing ETF in the portfolios.
U.S. Small Company Stocks—Fundamental
- What is it?
U.S. small company stocks—fundamental are investments in the equity of smaller U.S. companies that are included in fundamental indexes, which screen and weight companies based on fundamental factors such as sales, cash flow and dividends. Most traditional stock indexes are constructed based on market-cap (e.g., S&P 500®, Russell 2000®, etc.), where companies with the largest market capitalizations have the largest weights. Including allocations to fundamentally weighted indexes adds diversification within a portfolio and may improve risk-adjusted returns over time. Due to their differences in construction, fundamentally weighted indexes tend to behave differently than market cap-weighted indexes in different market environments while retaining benefits of traditional indexing such as transparency and relatively low-cost implementation. - What role does it play in a portfolio?
Investments in fundamentally weighted ETFs and traditional market-cap weighted ETFs can be used as a complement to each other because they differ in their performance under various market environments. The end result is a portfolio that we believe will result in better risk-adjusted results over time. - When does it perform well?
Based on research conducted by Research Affiliates, LLC, FTSE Russell, and Schwab Center for Financial Research among others, fundamental index strategies have outperformed market-cap indexes over longer time periods. This is partly attributable to the fact that the fundamental strategies break the link of assigning a weighting with the price of the stock. A market-cap index provides the largest weighting to the largest companies regardless of valuation. As a result, market-cap indexes can be described as "overweighting over priced stocks and underweighting undervalued stocks."4Since fundamental index strategies tend to overweight companies that appear cheap based on various financial metrics, they tend to outperform in environments that reward such "cheap" aka value stocks. As for their absolute level of performance, fundamental strategies are affected in much the same way and by the same factors as U.S. small company stocks. - When does it perform poorly?
Fundamental strategies may lag market-cap indexes in "boom" or "momentum" periods or when the biggest companies (as measured by market capitalization) dramatically outperform the smaller companies in an index. - ETF Selection
ETF Selection - U.S. Small Company Stocks—Fundamental
- Name
- Ticker
- Operating Expense Ratio
-
Primary ETF
>
Name
Schwab Fundamental U.S. Small Company
>
Ticker
FNDA
>
Operating Expense Ratio
0.25%
>
-
Secondary ETF
>
Name
Invesco FTSE RAFI U.S. 1500
>
Ticker
PRFZ
>
Operating Expense Ratio
0.39%
>
Source: Morningstar Direct, as of 2/28/2023.
U.S. Small Company Stocks—Fundamental continued
Why these ETFs were selected:Based on Morningstar classifications, two ETF providers offered ETFs in this category at the time of ETF selection. While there are many indexing approaches that incorporate various fundamental factors, classifications for fundamental strategies within Schwab Intelligent Portfolios are based on Morningstar's classifications for index selection and index weighting (among other data points).At the time of ETF selection, there were only two ETFs classified within this category. Both FNDA and PRFZ had over $2 billion in assets under management and have historically traded with relatively narrow bid-ask spreads. FNDA was selected as the primary ETF because it had the lowest expense ratio at the time of ETF selection. PRFZ, which is slightly more expensive, was selected as the secondary.
Why other ETFs were not selected:The category consists of just two ETFs.
International Developed Large Company Stocks
- What is it?
International developed large company stocks are investments in the equity of larger foreign companies that have high market capitalizations and are domiciled in countries with mature economies. The stock markets in these developed countries benefit from strong investor protections, corporate governance and legal infrastructure. Investing in these stocks involves additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. - What role does it play in a portfolio?
While U.S. companies can have vast international operations and exposure, investing solely in U.S. stocks means excluding nearly three-fourths of the global economy and over half of the world's stock market value. International developed large company stocks provide some of the same benefits as U.S. large-company stocks – growth potential and more stable financial results than smaller foreign companies – but provide diversification benefits due to their exposure to non-U.S. markets. In addition, investing in companies located overseas offers the potential to benefit from currency diversification—foreign company returns are generally denominated in foreign currencies, so they provide some protection against a potential fall in the value of the U.S. dollar relative to those currencies. - When does it perform well?
This asset class tends to perform well when international developed countries are growing more rapidly than the U.S. and when their currencies are appreciating against the U.S. dollar. Valuation matters as well. When prices are low relative to, for example, earnings, subsequent price performance is more likely to be strong. - When does it perform poorly?
When the U.S. dollar is gaining against these currencies, this asset class tends to perform poorly relative to U.S. stocks. The relative performance can also be poor when non-U.S. economies are weakening or expected to weaken. When prices are high relative to earnings, price performance can suffer. - ETF Selection
ETF Selection - International Developed Large Company Stocks
- Name
- Ticker
- Operating Expense Ratio
-
Primary ETF
>
Name
Schwab International Equity
>
Ticker
SCHF
>
Operating Expense Ratio
0.06%
>
-
Secondary ETF
>
Name
Vanguard FTSE Developed Markets
>
Ticker
VEA
>
Operating Expense Ratio
0.05%
>
Source: Morningstar Direct, as of 2/28/2023.
International Developed Large Company Stocks continued
- Why these ETFs were selected:SCHF and VEA provide diversified, low-cost exposure to developed market equities and had large amounts of assets, each with more than $30 billion in AUM at the time of ETF selection. These two ETFs had some of the lowest expense ratios in their category, and have historically traded with tight average bid-ask spreads.
- Why other ETFs were not selected:One of the largest funds in this category by assets is iShares MSCI EAFE (EFA), which also trades with a narrow bid-ask spread. However, EFA's expense ratio was significantly higher at the time of ETF selection. Among other potential ETFs in this category, iShares Core MSCI EAFE (IEFA) also had a higher expense ratio. CSIM also considers the potential impact to clients such as trading or other costs when selecting an ETF that would replace an existing ETF in the portfolios.
International Developed Large Company Stocks—Fundamental
- What is it?
International developed large company stocks – fundamental are investments in the equities of larger foreign companies that are included in fundamental indexes, which screen and weight companies based on fundamental factors such as sales, cash flow and dividends. Most traditional stock indexes are constructed based on market-cap (e.g., S&P 500®, Russell 2000®, etc.), where companies with the largest market capitalizations have the largest weights. Including allocations to fundamentally weighted indexes adds diversification within a portfolio and may improve risk-adjusted returns over time. Due to their differences in construction, fundamentally weighted indexes tend to behave differently than market cap-weighted indexes in different market environments while retaining benefits of traditional indexing such as transparency and relatively low-cost implementation. - What role does it play in a portfolio?
Investments in fundamentally weighted ETFs and traditional market-cap weighted ETFs can be used as complements in an investment portfolio because they tend to perform differently in various market environments. Including both market cap-weighted and fundamentally weighted ETFs in a portfolio can enhance diversification and potentially improve risk-adjusted results over time. - When does it perform well?
Based on research conducted by Research Affiliates, LLC, FTSE Russell, Schwab Center for Financial Research and others, fundamental index strategies have outperformed market-cap indexes over longer time periods. This is partly attributable to the fact that fundamental strategies break the link of assigning a weighting with the price of the stock. A market-cap index provides the largest weighting to the largest companies by market cap regardless of valuation. As a result, market-cap indexes can be described as "overweighting over priced stocks and underweighting undervalued stocks."5Since fundamental index strategies tend to overweight companies that appear cheap based on various financial metrics, they tend to outperform in environments that reward such "cheap" aka value stocks. As for their absolute level of performance, fundamental strategies are affected in much the same way and by the same factors as other international developed large company stocks. - When does it perform poorly?
Fundamental index strategies may lag market-cap indexes in "boom" or "momentum" periods or when the biggest companies (as measured by market capitalization) dramatically outperform the smaller companies in an index. - ETF Selection
ETF Selection -International Developed Large Company Stocks—Fundamental
- Name
- Ticker
- Operating Expense Ratio
-
Primary ETF
>
Name
Schwab Fundamental International Large Company
>
Ticker
FNDF
>
Operating Expense Ratio
0.25%
>
-
Secondary ETF
>
Name
Invesco FTSE RAFI Developed Markets ex-U.S.
>
Ticker
PXF
>
Operating Expense Ratio
0.45%
>
Source: Morningstar Direct, as of 2/28/2023.
International Developed Large Company Stocks—Fundamental continued
Why these ETFs were selected:Based on Morningstar classifications, two ETF providers offered ETFs in this category at the time of ETF selection. While there are many indexing approaches that incorporate various fundamental factors, classifications for fundamental strategies within Schwab Intelligent Portfolios are based on Morningstar's classifications for index selection and index weighting (among other data points). Among the two ETFs in this category, FNDF was selected as the primary ETF because it had the lowest expense ratio at the time of ETF selection. PXF, which was slightly more expensive in terms of OER, was selected as the secondary ETF. Both FNDF and PXF had sizable assets under management and have historically traded with relatively narrow bid-ask spreads.
Why other ETFs were not selected:The category consists of just two ETFs.
International Developed Small Company Stocks
- What is it?
International developed small company stocks are investments in the equity of smaller foreign companies that are domiciled in countries with mature economies and stock markets that benefit from strong investor protections, corporate governance and legal infrastructure. Investing in international developed small company stocks involves additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. - What role does it play in a portfolio?
Like U.S. small company stocks, these investments offer greater potential for growth than their large-cap counterparts. In addition, they provide diversification relative to U.S. markets because the revenues of these companies tend to be tightly tied to their home countries. By contrast, large multinational companies typically generate revenues in multiple geographies around the world. - When does it perform well?
International developed small company stocks typically perform well during the earlier stages of a global economic recovery. A strong foreign currency relative to the dollar also enhances the returns of international developed small company stocks. Valuation matters as well. When prices are low relative to earnings, for example, subsequent price performance is more likely to be strong. - When does it perform poorly?
A struggling global economy adversely impacts the performance of these stocks. When prices are high relative to earnings, price performance can suffer. - ETF Selection
ETF Selection -International Developed Small Company Stocks
- Name
- Ticker
- Operating Expense Ratio
-
Primary ETF
>
Name
Schwab International Small-Cap Equity
>
Ticker
SCHC
>
Operating Expense Ratio
0.11%
>
-
Secondary ETF
>
Name
Vanguard FTSE All-World ex-U.S. Small Cap
>
Ticker
VSS
>
Operating Expense Ratio
0.07%
>
Source: Morningstar Direct, as of 2/28/2023.
International Developed Small Company Stocks continued
Why these ETFs were selected:Finding low-cost exposure to international small company stocks can be challenging. Among thefunds in this category, expense ratios ranged from 0.07% to 0.60%. Each of our selected ETFs had competitive expense ratios,more than $3 billion in AUM at the time of ETF selection and have historically traded with relatively narrow bid-ask spreads.
Why other ETFs were not selected:iShares MSCI EAFE Small-Cap (SCZ) is the largest ETF in this category but had a significantly higher expense ratio at the time of ETF selection. SPDR®S&P International Small Cap ETF (GWX) also has a higher expense ratio.
International Developed Small Company Stocks—Fundamental
- What is it?
International developed small company stocks - fundamental are investments in the equities of smaller foreign companies that are included in fundamental indexes, which screen and weight companies based on fundamental factors such as sales, cash flow and dividends. Most traditional stock indexes are constructed based on market-cap (e.g., S&P 500®, Russell 2000®, etc.), where companies with the largest market capitalizations have the largest weights. Including allocations to fundamentally weighted indexes adds diversification within a portfolio and may improve risk-adjusted returns over time. Due to their differences in construction, fundamentally weighted indexes tend to behave differently than market cap-weighted indexes in different market environments while retaining benefits of traditional indexing such as transparency and relatively low-cost implementation. - What role does it play in a portfolio?
Investments in fundamentally weighted ETFs and traditional market-cap weighted ETFs can be used as complements in an investment portfolio because they tend to perform differently in various market environments. Including both market cap-weighted and fundamentally weighted ETFs in a portfolio can enhance diversification and potentially improve risk-adjusted results over time. - When does it perform well?
Based on research conducted by Research Affiliates, LLC, FTSE Russell, Schwab Center for Financial Research and others, fundamental index strategies have outperformed market-cap indexes over longer time periods. This is partly attributable to the fact that fundamental strategies break the link of assigning a weighting with the price of the stock. A market-cap index provides the largest weighting to the largest companies by market cap regardless of valuation. As a result, market-cap indexes can be described as "overweighting over priced stocks and underweighting undervalued stocks."6Since fundamental index strategies tend to overweight companies that appear cheap based on various financial metrics, they tend to outperform in environments that reward such "cheap" aka value stocks. As for their absolute level of performance, fundamental strategies are affected in much the same way and by the same factors as other international developed small company stocks. - When does it perform poorly?
Fundamental index strategies may lag market-cap indexes in "boom" or "momentum" periods, or when the biggest companies (as measured by market capitalization) dramatically outperform the smaller companies in an index. - ETF Selection
ETF Selection - International Developed Small Company Stocks—Fundamental
- Name
- Ticker
- Operating Expense Ratio
-
Primary ETF
>
Name
Schwab Fundamental International Small Company
>
Ticker
FNDC
>
Operating Expense Ratio
0.39%
>
-
Secondary ETF
>
Name
Invesco FTSE RAFI Developed Markets ex-U.S. Small-Mid
>
Ticker
PDN
>
Operating Expense Ratio
0.49%
>
Source: Morningstar Direct, as of 2/28/2023.
International Developed Small Company Stocks—Fundamental conrtinued
Why these ETFs were selected:Based on Morningstar classifications, two ETF providers offered ETFs in this category at the time of ETF selection. While there are many indexing approaches that incorporate various fundamental factors, classifications for fundamental strategies within Schwab Intelligent Portfolios are based on Morningstar's classifications for index selection and index weighting (among other data points). Among the two ETFs in the category, FNDC was selected as the primary ETF because it had the lowest expense ratio at the time of ETF selection and has historically exhibited slightly higher liquidity.
Why other ETFs were not selected:The category consists of just two ETFs.
International Emerging Market Stocks
- What is it?
Emerging market stocks are equity investments in foreign companies domiciled in countries with developing economies that have been experiencing rapid growth and industrialization. Emerging markets differ from their developed market counterparts in four main ways: (1) They have lower household incomes; (2) They are undergoing structural changes, such as modernization of infrastructure or moving from a dependence on agriculture to manufacturing; (3) Their economies are undergoing development and reform programs; (4) Their markets are less mature. Emerging markets are riskier than developed markets due to greater potential for political instability, currency fluctuations, an uncertain regulatory environment, volatility and higher investment costs. - What role does it play in a portfolio?
Emerging markets offer a unique combination of benefits: (1) Higher growth potential than developed markets, as corporate revenues have the potential to grow faster when economic growth is higher. (2) Diversification. By investing in emerging markets, diversification increases as emerging markets can perform differently than developed markets. - When does it perform well?
Emerging market stocks generally perform well during periods of faster growth when commodities are trading at relatively high levels, local export markets are thriving due to a growing economy, and local governments implement policies more conducive to private sector growth. Valuation matters as well. When prices are low relative to earnings, for example, subsequent price performance is more likely to be strong. - When does it perform poorly?
Emerging market stocks typically struggle when the U.S. is in a recession or experiencing a slow-growth environment. Also, due to their relatively high dependence on commodity sales, they typically don't perform well when commodities are experiencing declining prices. Periods of high geopolitical risk are also harmful for emerging market stocks. When stock prices are high relative to earnings, price performance can suffer. - ETF Selection
ETF Selection - International Emerging Market Stocks table
- Name
- Ticker
- Operating Expense Ratio
-
Primary ETF
>
Name
Schwab Emerging Markets Equity
>
Ticker
SCHE
>
Operating Expense Ratio
0.11%
>
-
Secondary ETF
>
Name
iShares Core MSCI Emerging Markets
>
Ticker
IEMG
>
Operating Expense Ratio
0.09%
>
Source: Morningstar Direct, as of 2/28/2023.
International Emerging Market Stocks continued
- Why these ETFs were selected:Nimble analysis is required to avoid potential pitfalls among emerging market equity ETFs. SCHE and IEMG both provide exposure to a diversified group of countries, unlike some funds which limit exposure to a single region or have a high concentration in one particular country. Furthermore, these are large ETFs with more than $8 billion in AUM each at the time of ETF selection. Each of these ETFs had low operating expense ratios at the time of ETF selection and have historically traded with relatively narrow bid-ask spreads (less than 0.05% in a category where spreads can be as high as 0.70%).
- Why other ETFs were not selected:iShares MSCI Emerging Markets (EEM) is one of the largest ETFs in this category but had a significantly higher expense ratio at the time of ETF selection. CSIM also considers the potential impact to clients such as trading or other costs when selecting an ETF that would replace an existing ETF in the portfolios.
International Emerging Market Stocks—Fundamental
- What is it?
International emerging market stocks—fundamental are investments in the equity of foreign companies that are based in countries experiencing rapid growth and industrialization, and are included in fundamental indexes, which screen and weight companies based on fundamental factors such as sales, cash flow and dividends. Most traditional stock indexes are constructed based on market-cap (e.g., S&P 500®, Russell 2000®, etc.), where companies with the largest market capitalizations have the largest weights. Including allocations to fundamentally weighted indexes adds diversification within a portfolio and may improve risk-adjusted returns over time. Due to their differences in construction, fundamentally weighted indexes tend to behave differently than market cap-weighted indexes in different market environments while retaining benefits of traditional indexing such as transparency and relatively low-cost implementation. - What role does it play in a portfolio?
Investments in fundamentally weighted ETFs and traditional market-cap weighted ETFs can be used as complements in an investment portfolio because they tend to perform differently in various market environments. Including both market cap-weighted and fundamentally weighted ETFs in a portfolio can enhance diversification and potentially improve risk-adjusted results over time. - When does it perform well?
Based on research conducted by Research Affiliates, LLC, FTSE Russell, Schwab Center for Financial Research and others, fundamental index strategies have outperformed market-cap indexes over longer time periods. This is partly attributable to the fact that fundamental strategies break the link of assigning a weighting with the price of the stock. A market-cap index provides the largest weighting to the largest companies by market cap regardless of valuation. As a result, market-cap indexes can be described as "overweighting over priced stocks and underweighting undervalued stocks."7Since fundamental index strategies tend to overweight companies that appear cheap based on various financial metrics, they tend to outperform in environments that reward such "cheap" aka value stocks. As for their absolute level of performance, fundamental strategies are affected in much the same way and by the same factors as other emerging market stocks. - When does it perform poorly?
Fundamental index strategies may lag market-cap indexes in "boom" or "momentum" periods or when the biggest companies (as measured by market capitalization) dramatically outperform the smaller companies in an index. - ETF Selection
ETF Selection - International Emerging Market Stocks—Fundamental table
- Name
- Ticker
- Operating Expense Ratio
-
Primary ETF
>
Name
Schwab Fundamental Emerging Markets Large Company
>
Ticker
FNDE
>
Operating Expense Ratio
0.39%
>
-
Secondary ETF
>
Name
Invesco FTSE RAFI Emerging Markets
>
Ticker
PXH
>
Operating Expense Ratio
0.49%
>
Source: Morningstar Direct, as of 2/28/2023.
International Emerging Market Stocks—Fundamental continued
Why these ETFs were selected:Based on Morningstar classifications, two ETF providers offered ETFs in this category at the time of ETF selection. While there are many indexing approaches that incorporate various fundamental factors, classifications for fundamental strategies within Schwab Intelligent Portfolios are based on Morningstar's classifications for index selection and index weighting (among other data points). Among the two ETFs in this category, FNDE was selected as the primary ETF because it had the lowest expense ratio at the time of ETF selection. PXH, which had a slightly higher expense ratio, was selected as the secondary ETF. Both ETFs had more than $1 billion in assets under management at the time of ETF selection and have traded with reasonable average bid-ask spreads historically.
Why other ETFs were not selected:The category consists of just two ETFs.
U.S. Exchange-Traded REITs
- What is it?
U.S. real estate investment trusts (REITs) are real estate related securities traded on U.S. exchanges. REITs invest in many underlying properties, including hospitals, shopping centers, office buildings, apartment buildings, and hotels. The IRS requires REITs to pay out at least 90% of their taxable income to unit holders every year. By doing so, REITs are often exempt from corporate income taxes on the portion of their income that is paid out to unit holders, avoiding the double taxation that many publicly traded companies experience. - What role does it play in a portfolio?
U.S. REITs can provide both inflation protection and income potential to a portfolio. REITs can also provide diversification to a portfolio of more traditional asset classes. Investors have long flocked to REITs (and real estate in general) because of their reputation as a hedge against inflation, as a way to increase diversification, and to generate income. - When does it perform well?
Since dividends from REITs generally increase with inflation, REITs tend to do better than most other asset class in moderate or high inflation environments. - When does it perform poorly?
REITs do poorly during recessions as occupancy rates and valuations may both fall in such environments. REITs also tend to do poorly during periods of rising interest rates when that rise isn't accompanied by higher inflation. - ETF Selection
ETF Selection - U.S. Exchange-Traded REITs table
- Name
- Ticker
- Operating Expense Ratio
-
Primary ETF
>
Name
Schwab U.S. REIT
>
Ticker
SCHH
>
Operating Expense Ratio
0.07%
>
-
Secondary ETF
>
Name
iShares Core U.S. REIT
>
Ticker
USRT
>
Operating Expense Ratio
0.08%
>
Source: Morningstar Direct, as of 2/28/2023.
U.S. Exchange-Traded REITs continued
Why these ETFs were selected:SCHH and USRT track market-cap weighted indexes of U.S. REITs, which are companies that own (and frequently manage) commercial and residential property. SCHH was selected as the primary ETF because it had the lowest expense ratio at the time of ETF selection. USRT also had a low expense ratio and was selected as the secondary ETF. Each of these ETFs are managed by firms with significant assets under management at the time of ETF selection.
Why other ETFs were not selected:Among other ETFs in this category, iShares Cohen & Steers REIT (ICF) and iShares U.S. Real Estate (IYR) had significantly higher expense ratios at the time of ETF selection.
International Exchange-Traded REITs
- What is it?
International exchange-traded REITs are investments in real estate investment trusts focused on real estate and/or mortgage securities traded in foreign countries. Like most securities, REITs are exposed to potential downturns in specific sectors/regions of the real-estate markets and the broader economy and also contain additional risks due to potential leverage. - What role does it play in a portfolio?
International real estate is appealing for a number of reasons: It has the potential to deliver strong performance, attractive yields and diversification relative to traditional investments. In addition, investing in companies located overseas offers the potential to benefit from currency diversification. Foreign company returns are denominated in foreign currencies, so they provide some protection against a potential fall in the value of the U.S. dollar relative to those currencies. - When does it perform well?
As is the case with many other securities with exposure to real estate markets, international REITs typically perform well during declining interest rate environments and when banks are expanding their lending portfolios. They also tend to hold up well against inflationary pressures. - When does it perform poorly?
As is the case with most asset classes, recessions generally don't bode well for international exchange-traded REITs. Periods of sharply rising interest rates can also be difficult for this type of investment. - ETF Selection
ETF Selection - International Exchange-Traded REITs table
- Name
- Ticker
- Operating Expense Ratio
-
Primary ETF
>
Name
Xtrackers International Real Estate
>
Ticker
HAUZ
>
Operating Expense Ratio
0.10%
>
-
Secondary ETF
>
Name
Vanguard Global ex-U.S. Real Estate
>
Ticker
VNQI
>
Operating Expense Ratio
0.12%
>
Source: Morningstar Direct, as of 2/28/2023.
International Exchange-Traded REITs continued
Why these ETFs were selected:Since U.S. REITs are a different asset class within Schwab Intelligent Portfolios,the ETFs selected here should target REITs from outside the U.S.HAUZ and VNQI provide well-rounded exposure to international REITs, and they have the lowest OERs in this category.
Why other ETFs were not selected:SPDR®Dow Jones International Real Estate ETF (RWX) (among the largest funds in this category)has historically traded with a narrow bid-ask spread, but it was not selected because it had a significantly higher expense ratio at the time of ETF selection. Among other ETFs in this category, iShares International Developed Property (WPS) and iShares International Developed Real Estate ETF(IFGL) also had higher expense ratios.
U.S. High Dividend Stocks
- What is it?
U.S. high dividend stocks represent the equity of U.S. companies that tend to distribute higher-than-average dividends to shareholders. These are typically large company stocks, as a higher percentage of large companies pay dividends compared with small companies. Historically, high dividend strategies have resulted in vastly different sector weights than market capitalization-weighted strategies. Currently within the S&P 500, a market-cap-weighted index, the largest sectors are Information Technology and Health Care. Within high dividend strategies the largest sectors have often been high dividend-yielding sectors such as Industrials. - What role does it play in a portfolio?
These stocks typically are well-suited for investors seeking both growth and income from their investments because they deliver more predictable annual income than the average stock, may reduce volatility and could appreciate over time. Dividend-paying companies are generally perceived to be more stable than those that don't pay dividends because they are returning excess capital to shareholders. - When does it perform well?
High dividend paying stocks perform well in most markets. They have exhibited particularly strong relative performance versus non-dividend paying equities during bear markets. Valuation matters as well. When prices are low relative to earnings, for example, subsequent price performance is more likely to be strong. - When does it perform poorly?
High dividend paying stocks may struggle to keep pace during more speculative bull market periods when stock price returns make up a larger portion of total returns, which include dividends plus stock price appreciation. Faster-growing companies that pay little or no dividends may see stronger stock price returns in this type of environment than companies that distribute earnings in the form of dividends rather than investing those earnings back into potential growth. - ETF Selection
ETF Selection - U.S. High Dividend Stocks
- Name
- Ticker
- Operating Expense Ratio
-
Primary ETF
>
Name
Schwab U.S. Dividend Equity
>
Ticker
SCHD
>
Operating Expense Ratio
0.06%
>
-
Secondary ETF
>
Name
Vanguard High Dividend Yield
>
Ticker
VYM
>
Operating Expense Ratio
0.06%
>
Source: Morningstar Direct, as of 2/28/2023.
U.S. High Dividend Stocks continued
Why these ETFs were selected:Finding the right fit in the high dividend category can be challenging, since a high dividend payment may not be sustainable or may be the result of a falling stock price. However, screens that are too restrictive can result in low yield and sector deviations that are inconsistent with asset class goals.
At the time of ETF selection, SCHD held approximately 100 stocks with a history of fundamental strength and consistent dividend payments.SCHD was selected as the primary ETF because it had one of the lowest expense ratios at the time of ETF selection along with a history of trading with a narrow average bid-ask spread. VYM was selected as the secondary ETF as it provides a diversified portfolio of high dividend paying stocks, while still screening for dividend sustainability (stocks must be forecast to continue paying dividends for the next 12 months). Both ETFs have more than $40 billion in AUM and narrow bid-ask spreads.
Why other ETFs were not selected:Among other ETFs in this category, Vanguard Dividend Appreciation ETF (VIG) was not selected as the secondary due to more representative asset class coverage by VYM. VIG limits its portfolio to stocks that have increased their dividend for at least 10 years, resulting in a lower yield than either SCHD or VYM. SPDR®S&P Dividend ETF (SDY) and iShares Select Dividend (DVY) had higher expense ratios at the time of ETF selection.
International High Dividend Stocks
- What is it?
International high dividend stocks are investments in the equity of foreign companies that tend to distribute higher-than-average dividends. Dividend-paying companies are generally perceived to be more stable than those that don't pay dividends because they are returning excess capital to shareholders. As with most international assets, investing in international high dividend stocks involves additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. - What role does it play in a portfolio?
These stocks are well-suited for investors seeking both growth and income from their investments as well as international diversification. These investments offer the same potential benefits as domestic dividend generating securities, plus the added diversification benefits of international exposure. - When does it perform well?
High dividend stocks generally perform competitively with other stocks in most market climates, but tend to outperform relative to other stocks during market downturns. Valuation matters as well. When prices are low relative to, for example, earnings, subsequent price performance is more likely to be strong. - When does it perform poorly?
International developed high dividend stocks may perform poorly in higher return, more speculative markets where capital appreciation accounts for a higher percentage of total return. - ETF Selection
ETF Selection - International High Dividend Stocks table
- Name
- Ticker
- Operating Expense Ratio
-
Primary ETF
>
Name
Xtrackers MSCI EAFE High Dividend Yield Equity
>
Ticker
HDEF
>
Operating Expense Ratio
0.20%
>