Comparing Schwab Mutual Funds & ETFs

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
happenstance
Posts: 46
Joined: Sun Jul 26, 2015 11:24 am
Location: NYC

Comparing Schwab Mutual Funds & ETFs

Post by happenstance » Tue Dec 19, 2017 10:08 am

In February 2017, Schwab reduced the expenses of its index mutual funds, which have inception dates ~1998, to match the fees of their newer ETF products they introduced ~2009. Unlike Vanguard funds and ETFs, which are typically just different share classes of the same underlying fund, these are two pairs of funds that share the same investment goals but have differences in construction.

U.S. Equity
SWTSX - Schwab Total Stock Market Index Fund / SCHB - Schwab U.S. Broad Market Equity ETF
ER: 0.03%

The mutual fund SWTSX tracks the Dow Jones U.S. Total Stock Market Index using a statistical sampling method. In total, the index contains 3,833 stocks (as of Feb 2017) and the fund holds 2,353 of those (Sept 2017). The ETF SCHB tracks the Dow Jones U.S. Broad Stock Market Index using a statistical sampling method. Its index contains 2,460 stocks (Dec 2016) and the fund holds 1,982 (Dec 2017).

The big difference is in the number of holdings, both in the index and the funds that track them. Rick Ferri wrote for Forbes in 2013:
Broad market indexes are not total market indexes. They leave out many micro-cap stocks, which are the smallest companies that trade on stock exchanges. Broad market indexes only include securities with reasonable size and liquidity so that they can be purchased in an institutional size portfolio. Many micro-cap securities don’t trade with enough volume to be efficiently included in products such as index funds and exchange-traded funds (ETF).
And indeed looking at the Style Details on Morningstar for SWTSX and SCHB, SWTSX has a higher percentage of small- and micro-cap stocks:

Code: Select all

       Giant / Large / Medium / Small / Micro
SWTSX  41.54 / 29.81  / 19.14 / 7.10  / 2.41
SCHB   41.81 / 30.51  / 19.08 / 6.85  / 1.75
Just based on indexes, it would appear that SWTSX is preferable, though in practice it only holds 371 more stocks than SCHB. However tax considerations are also a factor. As an ETF, SCHB is significantly less likely to pay out capital gains, and it has not done so for the past five years. On the other hand, the mutual fund has paid out modest capital gains since 2013.

It is hard to pick which one of these is the better vehicle for broad exposure to U.S. equity markets. The differentiator may well be whether the investor prefers the mutual fund or ETF wrapper more than anything else. Personally I use SWTSX because I was not aware of ETFs when I began investing, and now I have a sizable position in the fund. If I were starting again today, I would lean towards SCHB for the tax efficiency, but I also have a dedicated tilt to small (and value) that captures some of the exposure that SCHB is missing.

International Equity
SWISX - Schwab International Index Fund / SCHF - Schwab International Equity ETF
ER: 0.06%

The mutual fund SWISX tracks MSCI EAFE Index, and the prospectus does not state that a statistical sampling technique is used. The index includes stocks from 21 countries, and the fund holds 950 stocks (as of Sept 2017). The ETF SCHF tracks FTSE Developed ex US Index using a statistical sampling technique. The index includes stocks from 24 countries and holds 1,479; the fund holds 1,298 of those (as of Dec 2017).

Comparing the condensed portfolio holdings from each's most recent annual report, SCHF includes Canada and Republic of Korea while SWISX does not. (That only accounts for 23 countries, rather than the 24 listed in the prospectus. The SCHF listing matches the latest index factsheet posted on FTSE's website. The Bogleheads Wiki page seems to indicate that Greece used to be in this index but is no longer).

Additionally, SCHF has a higher allocation to medium-sized companies than SWTSX:

Code: Select all

       Giant / Large / Medium / Small / Micro
SWISX  59.07 / 34.24  / 6.65  / 0.03  / 0.00
SCHF   56.04 / 33.56  / 10.32 / 0.05  / 0.02
SCHF seems to be the superior holding, both in terms of greater exposure to countries (includes Canada and Korea) and number of stocks (348 more than SWISX), in addition to the more tax efficient ETF wrapper.

One consideration, though, is if the investor is pairing one of these funds with an emerging markets fund. If paired with SCHE - Schwab Emerging Markets Equity ETF, that is based on FTSE Emerging Index and does not include South Korea. But if the investor is using FNDE - Schwab Fundamental Emerging Markets Large Company Index ETF, that tracks Russell RAFI Emerging Markets Large Co. Index which does include South Korea. That means using SCHF+FNDE could slightly overweight Korean exposure.

Summary
Schwab's two pairs of broad equity funds are similar in spirit but have some noticeable differences under-the-hood. All are low-cost and can be used to construct a well-diversified portfolio, but tax considerations could make the ETFs more attractive to some investors. Choosing either should not materially affect the outcomes for a disciplined buy-and-hold investor. In addition, both sets of funds would make good tax-loss harvesting pairs, since they track different indexes and would not be considered "substantially identical."

4strings
Posts: 140
Joined: Fri Feb 19, 2010 4:49 pm

Re: Comparing Schwab Mutual Funds & ETFs

Post by 4strings » Wed Dec 20, 2017 10:23 am

great deep dive and write up, thank you for sharing.

I implement with swtsx/swisx/swagx solely because I am not required to preclear purchases through my employer given that they are open ended mutual funds as opposed to the ETFs.

ProdigalSon
Posts: 15
Joined: Mon Jul 08, 2013 7:49 am

Re: Comparing Schwab Mutual Funds & ETFs

Post by ProdigalSon » Wed Dec 20, 2017 10:56 am

Yes, thank you very much for this, Happenstance. I have previously paired SWISX with SCHF for tax loss harvesting purposes and been satisfied with the result.

LasixDrip
Posts: 12
Joined: Fri Dec 08, 2017 10:20 pm

Re: Comparing Schwab Mutual Funds & ETFs

Post by LasixDrip » Wed Dec 20, 2017 9:49 pm

Thanks for the info, I’ve been looking for just this for a while. I’ve had a great experience w Schwab, always unsure if I should add to the ETF or mutual fund. Knew there were subtle differences, but nice to see them highlighted.
I do like to see the daily changes displayed by the ETF if I check mid-day. Is that silly?

Alan S.
Posts: 7787
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Comparing Schwab Mutual Funds & ETFs

Post by Alan S. » Wed Dec 20, 2017 10:30 pm

In the process of re allocating my SCHE and SCHF ETFs from my IRA to my Schwab One account, I was trying to get a handle on what amount of foreign tax credit to expect. Have had two Schwab reps state that these funds have produced a minimum FTC due to their structure in contrast to similar index funds.

Roughly SCHF produces about a 2% dividend yield, SCHE about 1.8%. Assuming an average tax treaty rate of 20% would result in an expected .4% withheld in foreign taxes, but am being told that the FTC is far less.

It is not clear whether the foreign taxes are not being withheld in the first place, or whether they are and the FTC is not being passed through for some reason. Schwab does not publish the FTC% per share or as a % of ETF value. In addition to the tax efficiency issue, I would like to stay below the Form 1116 threshold of $600 for joint filers and simply take the direct credit while avoiding this nasty form.

Any additional comments on this matter would be appreciated.

User avatar
triceratop
Moderator
Posts: 5717
Joined: Tue Aug 04, 2015 8:20 pm
Location: la la land

Re: Comparing Schwab Mutual Funds & ETFs

Post by triceratop » Wed Dec 20, 2017 10:45 pm

Alan S. wrote:
Wed Dec 20, 2017 10:30 pm
In the process of re allocating my SCHE and SCHF ETFs from my IRA to my Schwab One account, I was trying to get a handle on what amount of foreign tax credit to expect. Have had two Schwab reps state that these funds have produced a minimum FTC due to their structure in contrast to similar index funds.

Roughly SCHF produces about a 2% dividend yield, SCHE about 1.8%. Assuming an average tax treaty rate of 20% would result in an expected .4% withheld in foreign taxes, but am being told that the FTC is far less.

It is not clear whether the foreign taxes are not being withheld in the first place, or whether they are and the FTC is not being passed through for some reason. Schwab does not publish the FTC% per share or as a % of ETF value. In addition to the tax efficiency issue, I would like to stay below the Form 1116 threshold of $600 for joint filers and simply take the direct credit while avoiding this nasty form.

Any additional comments on this matter would be appreciated.
If anyone gives me the actual per-share foreign taxes paid for these funds I can include them in my spreadsheet and give you precise figures. Schwab does not publicly post them, at least not for investor fiscal years (the annual reports have some figures for fund years)
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

User avatar
in_reality
Posts: 4529
Joined: Fri Jul 12, 2013 6:13 am

Re: Comparing Schwab Mutual Funds & ETFs

Post by in_reality » Thu Dec 21, 2017 3:55 am

triceratop wrote:
Wed Dec 20, 2017 10:45 pm
Alan S. wrote:
Wed Dec 20, 2017 10:30 pm
In the process of re allocating my SCHE and SCHF ETFs from my IRA to my Schwab One account, I was trying to get a handle on what amount of foreign tax credit to expect. Have had two Schwab reps state that these funds have produced a minimum FTC due to their structure in contrast to similar index funds.

Roughly SCHF produces about a 2% dividend yield, SCHE about 1.8%. Assuming an average tax treaty rate of 20% would result in an expected .4% withheld in foreign taxes, but am being told that the FTC is far less.

It is not clear whether the foreign taxes are not being withheld in the first place, or whether they are and the FTC is not being passed through for some reason. Schwab does not publish the FTC% per share or as a % of ETF value. In addition to the tax efficiency issue, I would like to stay below the Form 1116 threshold of $600 for joint filers and simply take the direct credit while avoiding this nasty form.

Any additional comments on this matter would be appreciated.
If anyone gives me the actual per-share foreign taxes paid for these funds I can include them in my spreadsheet and give you precise figures. Schwab does not publicly post them, at least not for investor fiscal years (the annual reports have some figures for fund years)
Are you looking for 2016 or 2017 data when it’s out?

Am travel so can’t look right now but will if no one else does.

User avatar
triceratop
Moderator
Posts: 5717
Joined: Tue Aug 04, 2015 8:20 pm
Location: la la land

Re: Comparing Schwab Mutual Funds & ETFs

Post by triceratop » Thu Dec 21, 2017 4:00 am

in_reality wrote:
Thu Dec 21, 2017 3:55 am
triceratop wrote:
Wed Dec 20, 2017 10:45 pm
Alan S. wrote:
Wed Dec 20, 2017 10:30 pm
In the process of re allocating my SCHE and SCHF ETFs from my IRA to my Schwab One account, I was trying to get a handle on what amount of foreign tax credit to expect. Have had two Schwab reps state that these funds have produced a minimum FTC due to their structure in contrast to similar index funds.

Roughly SCHF produces about a 2% dividend yield, SCHE about 1.8%. Assuming an average tax treaty rate of 20% would result in an expected .4% withheld in foreign taxes, but am being told that the FTC is far less.

It is not clear whether the foreign taxes are not being withheld in the first place, or whether they are and the FTC is not being passed through for some reason. Schwab does not publish the FTC% per share or as a % of ETF value. In addition to the tax efficiency issue, I would like to stay below the Form 1116 threshold of $600 for joint filers and simply take the direct credit while avoiding this nasty form.

Any additional comments on this matter would be appreciated.
If anyone gives me the actual per-share foreign taxes paid for these funds I can include them in my spreadsheet and give you precise figures. Schwab does not publicly post them, at least not for investor fiscal years (the annual reports have some figures for fund years)
Are you looking for 2016 or 2017 data when it’s out?

Am travel so can’t look right now but will if no one else does.
I'll settle for 2016 & 2017, or only 2017 when it comes out if that's only possible. I think it has to come from an actual fund owner, so if you own them and can back that out of the 1099 then that would be fantastic.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Chip
Posts: 2269
Joined: Wed Feb 21, 2007 4:57 am

Re: Comparing Schwab Mutual Funds & ETFs

Post by Chip » Thu Dec 21, 2017 5:10 am

triceratop wrote:
Wed Dec 20, 2017 10:45 pm
If anyone gives me the actual per-share foreign taxes paid for these funds I can include them in my spreadsheet and give you precise figures. Schwab does not publicly post them, at least not for investor fiscal years (the annual reports have some figures for fund years)
You have 2016 numbers for SCHF and FNDF in this post from your tax efficiency thread.

Chip
Posts: 2269
Joined: Wed Feb 21, 2007 4:57 am

Re: Comparing Schwab Mutual Funds & ETFs

Post by Chip » Thu Dec 21, 2017 5:32 am

Alan S. wrote:
Wed Dec 20, 2017 10:30 pm
In the process of re allocating my SCHE and SCHF ETFs from my IRA to my Schwab One account, I was trying to get a handle on what amount of foreign tax credit to expect. Have had two Schwab reps state that these funds have produced a minimum FTC due to their structure in contrast to similar index funds.

Roughly SCHF produces about a 2% dividend yield, SCHE about 1.8%. Assuming an average tax treaty rate of 20% would result in an expected .4% withheld in foreign taxes, but am being told that the FTC is far less.

It is not clear whether the foreign taxes are not being withheld in the first place, or whether they are and the FTC is not being passed through for some reason. Schwab does not publish the FTC% per share or as a % of ETF value. In addition to the tax efficiency issue, I would like to stay below the Form 1116 threshold of $600 for joint filers and simply take the direct credit while avoiding this nasty form.

Any additional comments on this matter would be appreciated.
I think the Schwab reps were mistaken, based on my ownership of SCHF and FNDF.

For SCHF, foreign tax paid as a percentage of gross dividends in 2016 was 8.87%, or $.063239/share. Gross dividends per share last year were $.776339.

I am assuming that dividends/share will grow 2% this year and so will the associated foreign taxes. But that's a WAG, I have no real basis for that assumption.

With those assumptions, FTC/share would be $.0645. Staying under the $600 limit would mean less than 9300 shares if you only owned SCHF. But you'll have to account for future growth or you'll ultimately end up above $600 anyway.

Form 1116 isn't so bad once you've been through it the first time. And it's even easier if by some happenstance you might be taking the standard deduction in future years. But I agree the first time isn't much fun. :D

One thing you do want to make sure of if you decide to exceed the $600 limit: Do not exceed 20k of qualified dividend income from foreign sources. That triggers a calculation on Form 1116 that can significantly reduce allowable FTC, especially if you are in the lower tax brackets. And be sure to allow for future growth in dividends, as the 20k limit isn't indexed. Neither is the $600 limit.

User avatar
grabiner
Advisory Board
Posts: 22879
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Comparing Schwab Mutual Funds & ETFs

Post by grabiner » Thu Dec 21, 2017 10:34 pm

Chip wrote:
Thu Dec 21, 2017 5:32 am
One thing you do want to make sure of if you decide to exceed the $600 limit: Do not exceed 20k of qualified dividend income from foreign sources. That triggers a calculation on Form 1116 that can significantly reduce allowable FTC, especially if you are in the lower tax brackets. And be sure to allow for future growth in dividends, as the 20k limit isn't indexed. Neither is the $600 limit.
You aren't likely to be in the lower tax brackets if the $20K rule applies to you. You would need to have about $1M in foreign stock funds in your taxable account to get $20K in foreign qualified dividends, implying a portfolio of about $4M. In the higher tax brackets, the limitation probably won't cost you much if it applies.
Wiki David Grabiner

Chip
Posts: 2269
Joined: Wed Feb 21, 2007 4:57 am

Re: Comparing Schwab Mutual Funds & ETFs

Post by Chip » Fri Dec 22, 2017 6:23 am

grabiner wrote:
Thu Dec 21, 2017 10:34 pm
You aren't likely to be in the lower tax brackets if the $20K rule applies to you. You would need to have about $1M in foreign stock funds in your taxable account to get $20K in foreign qualified dividends, implying a portfolio of about $4M. In the higher tax brackets, the limitation probably won't cost you much if it applies.
I'm not so sure about "not likely". At least not for early retirees in Boglehead Land. With SCHF it would have required 720k of value on 12/31/16 (currently worth 890k).

For someone with 35% of equities in international that would imply about 2M in equities at the beginning of 2017, or maybe 3M total for a 65/35 portfolio. Even if one was terribly tax-inefficient and put another 720k of Total Bond in taxable that would result in 19k of ordinary income from the bonds along with 20k of QDI and 2k of non-QDI from SCHF. So 41k total income before deductions and exemptions. For MFJ that's easily in the 15% bracket with 0% for QDI.

I'm not saying that one can't get out of that situation once there, but it will require realizing some capital gains, perhaps at an inopportune time. Forewarned is forearmed. :beer

Chip
Posts: 2269
Joined: Wed Feb 21, 2007 4:57 am

Re: Comparing Schwab Mutual Funds & ETFs

Post by Chip » Fri Dec 22, 2017 9:13 am

Chip wrote:For SCHF, foreign tax paid as a percentage of gross dividends in 2016 was 8.87%, or $.063239/share. Gross dividends per share last year were $.776339.

I am assuming that dividends/share will grow 2% this year and so will the associated foreign taxes. But that's a WAG, I have no real basis for that assumption.

With those assumptions, FTC/share would be $.0645. Staying under the $600 limit would mean less than 9300 shares if you only owned SCHF. But you'll have to account for future growth or you'll ultimately end up above $600 anyway.
The 2017 dividends for SCHF and FNDF hit my account this morning. My WAG on dividend growth was way off. SCHF dividend increased to $.8008 per share. FNDF went up to $.7053 per share. And these are dividends NET of foreign taxes, vs. the gross numbers in the quote above.

On an apples-to-apples basis the SCHF dividend increased 12.3% (.8008 vs. .7131). FNDF increased 15.9% (.7053 vs. .6084).

Based on my preliminary numbers I will have to carry over some of my 2017 FTC to future years because of my low overall tax rate.

User avatar
cookymonster
Posts: 190
Joined: Wed Nov 05, 2014 12:22 pm

Re: Comparing Schwab Mutual Funds & ETFs

Post by cookymonster » Sun Feb 04, 2018 4:59 pm

I didn't want to start a new thread for this. Is it possible to get up-to-date Schwab annual reports anywhere online? I can find old reports from Morningstar, but that's it.

I would like to figure out what the tax efficiency for the ETF's are (including foreign tax paid). I would also like to figure out how much securities lending income they generate. But I don't see how to do this without access to the annual report.

I have generally preferred Schwab etf's to Vanguard and ishares but I'm trying to get better at including securities lending income in forming comparisons. I may stop putting new money in them if that information isn't available.

happenstance
Posts: 46
Joined: Sun Jul 26, 2015 11:24 am
Location: NYC

Re: Comparing Schwab Mutual Funds & ETFs

Post by happenstance » Sun Feb 04, 2018 5:14 pm

cookymonster wrote:
Sun Feb 04, 2018 4:59 pm
I didn't want to start a new thread for this. Is it possible to get up-to-date Schwab annual reports anywhere online? I can find old reports from Morningstar, but that's it.

I would like to figure out what the tax efficiency for the ETF's are (including foreign tax paid). I would also like to figure out how much securities lending income they generate. But I don't see how to do this without access to the annual report.

I have generally preferred Schwab etf's to Vanguard and ishares but I'm trying to get better at including securities lending income in forming comparisons. I may stop putting new money in them if that information isn't available.
You can find the latest documents on the Schwab Funds website.

But you can also always find this information for any fund using the SEC's Edgar website, which also archives the historical documents. It's a little less friendly to navigate than the Schwab site, though.

afan
Posts: 3870
Joined: Sun Jul 25, 2010 4:01 pm

Re: Comparing Schwab Mutual Funds & ETFs

Post by afan » Sun Feb 04, 2018 5:33 pm

I would just point out that the performance of SCHB, SWTSX and for that matter VTI are essentially identical, tiny differences in composition notwithstanding. These are all cap weighted funds and they have all the big stocks, which dominate the returns of the total market. If you can buy SCHB at no cost, then buy it. If you can buy VTI at no cost, then buy it. If you make large enough trades that single digit commissions get lost in rounding error, then buy either one.

Avoiding capital gains distributions in a taxable account is a valid consideration.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

happenstance
Posts: 46
Joined: Sun Jul 26, 2015 11:24 am
Location: NYC

Re: Comparing Schwab Mutual Funds & ETFs

Post by happenstance » Wed Mar 07, 2018 12:19 am

I came across the Dow Jones U.S. Total Stock Market Indices Methodology, which explains the difference between the TSM and Broad indexes, tracked by SWTSX and SCHB respectively:
The market representation threshold is 100% of the float-adjusted market capitalization for the U.S.
indices. Thus, the Dow Jones U.S. Total Stock Market Index includes all U.S. equity securities that have
readily available prices and pass liquidity screens.
Stocks ranked 600 or larger are automatically assigned to the Dow Jones U.S. Large-Cap Total
Stock Market Index. Current constituents ranked 900 or higher are selected, in descending
market capitalization order, until the index contains 750 stocks.
All Dow Jones U.S. Small-Cap Total Stock Market Index constituents not selected for the largecap
index ranked 2,000 or higher are automatically assigned to the small cap index. Current
small-cap constituents ranked 3,000 or higher are selected, in descending market capitalization
order, until the index contains 1,750 stocks.
The 2,500 stocks selected for the large-cap and small-cap indices comprise the Dow Jones U.S.
Broad Stock Market Index.
All remaining Dow Jones U.S. Total Stock Market Index stocks not selected for the Dow Jones
U.S. Broad Stock Market Index are added to the Dow Jones U.S. Micro-Cap Total Stock Market
Index.
The real difference is in the microcaps exposure. I suspect this is done for liquidity reasons, since those ultra-small companies can be thinly traded. As others note, the practical difference is likely negligible and may not outweigh the tax considerations of ETFs vs mutual funds.

And as far as I can tell, there is no ETF that actually tracks the Dow Jones U.S. Micro-Cap Total Stock Market Index.

Post Reply