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Accounts & Products
 

New Screening and Portfolio-Building Tools for Mutual Funds and ETFs

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Key Points

  • With the large universe of mutual funds available, along with a growing number of Exchange Traded Funds (ETFs), investors are faced with myriad choices when researching and assembling a portfolio.
  • Believing that both mutual funds and ETFs can have a place in a diversified portfolio, Schwab has developed two new tools to help self-directed investors in their research.
  • The new tools—one that provides investors guided choices in building a mutual fund or ETF portfolio; the other offering the ability to screen and compare mutual funds and ETFs side-by-side—can significantly streamline investor research and portfolio construction.

Self-directed investors who prefer to undertake their own research and portfolio construction are faced with an immense universe of choices: actively managed funds, index funds (both market cap–weighted and fundamental) and ETFs—not to mention individual securities, if they are so inclined. Deciding among them largely depends on an investor’s goals and risk tolerance. Are expenses of primary concern? Taxes? Is the ability to trade intra-day or use limit or stop orders important? Are you seeking niche exposure? Do you want the ability to try to outperform the market, or will you be satisfied with achieving market returns?

For more than two decades, Schwab—in the form of the Mutual Fund OneSource Select List®—has helped investors manage information overload by evaluating and screening mutual funds, using both quantitative and qualitative criteria, and presenting them in a concise, easy-to-understand format. Over the years, as the number of mutual funds and ETFs has grown, Schwab has continued to develop a robust array of research, comparison and portfolio-building tools to help investors make well-informed decisions. Two more are on the way. Before introducing them, we present a quick primer on the distinctions, advantages and disadvantages among various types of funds available to investors.

Traditional Mutual Funds

With U.S. assets totaling more than $13 trillion as of early 2017,1 mutual funds continue to be extremely popular. Whereas mutual funds generally don’t incur trading commissions, they do carry annual expenses and potentially other costs, such as sales fees. They are available in two primary types: index funds—distinguished by their goal of tracking to a benchmark index—and actively managed.

  • Index Funds
    Index mutual funds are passive investments that seek to match the performance of a market index. The primary appeal of strategies benchmarked to market cap–weighted indexes is their ability to provide cost-effective exposure to a broad market or market segment. By eliminating the need for a portfolio manager to actively manage the underlying investments, costs can be kept low. And because they rarely distribute capital gains, they are generally quite tax-efficient. However, index funds are subject to fluctuations that generally correspond with the index they track, so investors are essentially bound by the market’s movement.
     
  • “Smart Beta” Index Funds
    As traditional market cap–weighted funds evolved, index providers sought more-innovative strategies, many of which have gained traction as the foundation of what are often termed “smart beta” strategies. An increasingly popular one is the Fundamental Index® strategy2, which selects and weights stocks by financial measures other than market value, such as earnings, sales, and dividends—factors believed to more accurately represent a company’s “true” economic value than market-cap weighting.
     
  • Actively Managed Mutual Funds
    Actively managed funds generally seek to outperform their benchmark by applying the insights, strategy, and outlook of one or more managers who build their portfolio to reflect their expectations. Unlike index-based strategies, active managers have flexibility in responding to changing market conditions, so investors may benefit from increased returns and/or the potential to limit losses. Actively managed funds generally have higher operating expenses than index funds due to the staff and infrastructure required.
     

ETFs

Although they’ve been around for more than 20 years, ETFs have been gaining popularity in recent years; assets totaled $2.6 trillion as of early 2017.3 Like index mutual funds, most ETFs are passive, seeking to replicate the performance of a particular index, and therefore generally have very low annual expenses—some even lower than index funds. ETFs trade on an exchange, like stocks, so they can be bought and sold throughout the trading day at their market price, unlike mutual funds, which are bought and sold at their net asset value (NAV), calculated just once daily. ETFs may involve trading commissions, although some are available commission-free. And like index mutual funds, ETFs are generally highly tax-efficient.

Two New Tools to Help Investors Make Informed Decisions

Personalized Portfolio Builder

Schwab’s new online Personalized Portfolio Builder, an extension of the popular Mutual Fund Portfolio Builder, is designed to help Schwab clients establish a one-time, diversified portfolio of either mutual funds or ETFs. Whereas the previous version offered a pre-determined portfolio of funds based on an investor-specified risk profile, this new iteration adds several enhancements—most notably the ability to select among multiple funds within each asset class, and the ability to build a portfolio of ETFs as well as one of mutual funds.

After selecting one of five risk profiles, investors are presented with appropriate asset classes and, within each, five pre-screened mutual funds or ETFs, which they can then compare and contrast to help them choose one per asset class. In addition, for a mutual fund portfolio, investors can select among both active and index funds, and for an ETF portfolio, both market cap–weighted and fundamental ETFs are offered.

While the Personalized Portfolio Builder is ideal for investors with $5,000 or more wishing to create an initial portfolio, it’s also appropriate for experienced investors or those with greater financial resources who may not have sufficient time or interest to dedicate to portfolio building.

Coming Soon to Schwab.com: Fund Finder

Schwab’s new enhanced and expanded Fund Finder has added ETFs to the mix so that investors, upon selecting their screening criteria, will soon be able to view a list of both mutual funds and ETFs that meet those criteria. Screening criteria include management style, product type and asset class, as well as whether the funds stem from the Schwab Mutual Fund OneSource® and ETF OneSource™ platforms (no loads or transaction fees online in the case of mutual funds, and no commissions in the case of ETFs traded online) and/or inclusion on the ETF or Mutual Fund Select List.

Broad asset classes, such as U.S. equity, can be further parsed by large-, mid-, or small-cap, as well as by sector. On the results page, investors are presented with expense and performance information. From there, they can drill down even further, comparing up to five funds and/or ETFs side-by-side on factors including manager tenure, assets under management, detailed fee breakdowns, investment minimums, and risk and return characteristics. Hovering over a ticker symbol displays a pop-up box showing a concise snapshot of the fund or ETF. It’s a highly robust tool that greatly streamlines an investor’s ability to make well-informed fund-selection decisions.

The Value of Multiple Strategies

One of the key challenges for self-directed investors lies in narrowing down the type of investment best suited to help them achieve their goals. These two new tools provide them greater ability than ever to consider and evaluate various types of fund products and to determine which might be the best fit.

However, the answer isn’t necessarily one over another. To maximize diversification as well as retain some potential for market outperformance, we believe that a portfolio that blends both active and passive strategies, including funds and ETFs—as well as various types of passive strategies—can be the best solution. For self-directed investors, these two new tools should prove valuable in considering the various strategies. For those seeking more guidance or assistance, Schwab is here to help in other ways, such as by phone or via online chat.

Explore the new Personalized Portfolio Builder and Fund Finder at www.Scwhab.com and click Research. Not sure where to begin? Talk with us at 888-251-3974.



Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.