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ETF Managed Strategies

Exchange-traded funds (ETFs) have fundamentally altered the investing landscape. These funds—which trade like stocks and can track indexes of stocks, bonds or other investments—can offer investors a combination of built-in diversification and liquidity at a relatively low cost. No wonder they have become increasingly popular since their debut in the early 1990s.

There are now hundreds of different ETFs out there, giving investors access to particular segments of the market (large-cap U.S. stocks, for example), as well as to specific industries or geographical regions. U.S. ETFs held assets totaling $2.08 trillion at the end of June 2015, up nearly 14% from a year earlier, according to the Investment Company Institute.

Individual investors aren’t the only ones who have embraced these securities. Professional portfolio managers have also started tapping the low-cost diversification provided by ETFs and are now offering a variety of managed ETF products aimed at different goals. In fact, as of March 2015, Morningstar was tracking 700 managed ETF strategies from 151 firms with total assets of $86 billion.1 Some of these are all-in-one managed portfolios, while others focus on more tactical ends, such as risk management.

Here are three managed strategies offered through Charles Schwab & Co., Inc. and its affiliates that use ETFs: Schwab Intelligent Portfolios™, Schwab Managed Portfolios and Windhaven® Diversified Strategies. Each has a unique approach to managing risk and seeking returns.

Schwab Intelligent Portfolios

This spring Charles Schwab introduced Schwab Intelligent Portfolios, an innovative, low-cost way to tap into the power of professional portfolio management. Schwab Intelligent Portfolios, offered through Schwab Wealth Investment Advisory, Inc., is an automated investment advisory service that uses a sophisticated algorithm and the professional insight of Charles Schwab Investment Advisory, Inc. to create and manage diversified portfolios of ETFs that reflect an array of goals and risk sensitivities.

Each portfolio is composed of low-cost ETFs that track well-established indexes. Each ETF focuses on an asset class—such as stocks, bonds, commodities or real estate—and the portfolios can have up to 20 asset classes. The portfolios also include an FDIC-insured cash allocation that helps provide liquidity and stability. And to help boost diversification, the portfolios have ETFs that track differently constructed indexes. They include both traditional market cap-weighted and fundamentally weighted ETFs, which select and weight securities by companies’ financial measures, with the goal of helping to enhance diversification and improve risk-adjusted results over time.

The portfolios are monitored daily and are automatically rebalanced when asset classes drift too far from their target allocations. With a qualifying minimum, clients can also enroll in automated tax-loss harvesting, which means that your taxable accounts will be tracked daily for opportunities to offset capital gains by strategically realizing losses, potentially reducing your tax burden. In addition, clients who want to discuss their portfolio have around-the-clock access to Schwab investment professionals.

You can open a Schwab Intelligent Portfolios account for just $5,000. Lastly, Schwab Intelligent Portfolios doesn’t charge advisory fees, commissions or account service fees. Clients pay only the operating expenses of the underlying ETFs. Learn more at intelligent.schwab.com.

Schwab Managed Portfolios-ETFs

This option is geared toward investors who want to take advantage of ETFs’ cost and diversification benefits but would also like ongoing one-on-one support from a live investment professional. With Schwab Managed Portfolios, CSIA portfolio managers build globally diversified portfolios that include a “strategic” core allocation as well as a “tactical” allocation the portfolio manager can use to take advantage of short-term market opportunities (for example, when assets look under- or overvalued). The goal is to boost performance while continually monitoring risk.

Investors are placed in one of six Schwab Managed Portfolios-ETFs strategies based on their risk profile. Each model can provide exposure to five broad asset classes: U.S. stocks, international stocks, fixed income, real assets and cash. Schwab Managed Portfolios-ETFs also provide exposure to numerous sub-asset classes within both domestic and international equities, as well as varying types of bonds, commodities like gold and real estate investment trusts (REITs). Cash allocations typically range from 5% to 25%, depending on the strategy.

Portfolio managers complement the passive asset allocation by applying their research capabilities to monitor, rebalance and make short-term adjustments (tactical shifts) to portfolio holdings, all in a bid to boost performance while continually monitoring risk. In addition, clients receive ongoing one-on-one guidance from a named investment professional.

The minimum investment for Schwab Managed Portfolios-ETFs is $25,000, and annual program fees range from 0.5% to 0.9%, depending on the amount of assets in the account and excluding cash. In addition, clients pay the operating expenses of the underlying ETFs and money market funds.

Windhaven Diversified Strategies

This option might appeal to risk-focused investors who want active management that responds to changes in economic cycles. Windhaven offers three broadly diversified strategies, which invest primarily in low-cost index ETFs. Central to the strategy is ongoing evaluation of economic conditions, dynamic tactical asset allocation within and across asset classes, strategic asset allocation offering broad diversification and the ability to act quickly to mitigate downside risk. The goal is to capture growth when markets are rising and reduce exposure when they decline.

Windhaven’s strategies invest in a wide range of asset classes and may include exposure to U.S. and international stocks, fixed income securities, real estate, commodities and currencies. The Windhaven Research Team currently analyzes more than 40 asset classes and performs fundamental and quantitative analysis in planning for various investment scenarios and potential risks. Reallocation typically takes place three times a year, but interim reallocation trades may also take place depending on market conditions. Cash allocations are typically 2% to 3% unless cash is favored on a tactical basis and then the cash allocation will be higher.

Investors must have at least $100,000 in dedicated assets to take advantage of these strategies (or $25,000 for some ERISA-type accounts). Annual program fees range from 0.7% to 0.95%, and clients also pay the operating expenses of the underlying ETFs.

1“ETF Managed Portfolios Landscape: Q1 2015,” Morningstar.

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Important Disclosures

Past performance is no guarantee of future results; the value of investments and the income derived from them can go down as well as up. Future returns and the achievement of stated goals are not guaranteed, and a loss of principal may occur.

Schwab Intelligent Portfolios:

Cash balances held in the Sweep Program at Schwab Bank are eligible for FDIC insurance up to allowable limits.

Schwab Intelligent Portfolios charges no advisory fee. Schwab affiliates do earn revenue from the underlying assets in Schwab Intelligent Portfolios accounts. This revenue comes from managing Schwab ETFs and providing services relating to certain third-party ETFs that can be selected for the portfolio, and from the cash feature on the accounts. Revenue may also be received from the market centers where ETF trade orders are routed for execution.

Accounts must maintain a minimum balance of $5,000 to be eligible for automatic rebalancing.

Clients must enroll in tax loss harvesting to receive this service. See intelligent.schwab.com for more information on the qualifying minimum.

Schwab investment professionals are employees of Charles Schwab & Co., Inc.

Please read the Schwab Intelligent Portfolios’ disclosure brochures for important information.

Brokerage Products: Not FDIC Insured • No Bank Guarantee • May Lose Value

Schwab Intelligent Portfolios is made available through Schwab Wealth Investment Advisory, Inc. (“SWIA”), a registered investment advisor. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). SWIA and CSIA are affiliates of Charles Schwab & Co., Inc. (“Schwab”) and subsidiaries of The Charles Schwab Corporation.

Charles Schwab & Co., Inc. and Charles Schwab Bank are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products, including the Schwab One® brokerage account, are offered by Charles Schwab & Co., Inc., Member SIPC. Deposit and lending products are offered by Charles Schwab Bank, Member FDIC and an Equal Housing Lender.

Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

Investments in managed accounts should be considered in view of a larger, more diversified investment portfolio.

Portfolio management is provided by Windhaven Investment Management, Inc. ("Windhaven"), a registered investment advisor. Windhaven and Charles Schwab & Co., Inc. are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.

Windhaven’s risk management process includes an effort to monitor and manage risk, but should be not confused with and does not imply low risk, or the ability to control risk.

Windhaven Diversified Strategies are available through Schwab’s Managed Account Connection® program. Please read Schwab's disclosure brochure for important information and disclosures relating to Schwab Managed Account Connection and Schwab Managed Account Services™.

Portfolio management for Schwab Managed Portfolios is provided by Charles Schwab Investment Advisory, Inc. ("CSIA"), an affiliate of Charles Schwab and Co., Inc. ("Schwab"). Please read Schwab's disclosure brochure for important information and disclosures relating to Schwab Managed Portfolios.

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