Performance October 6, 2015

    Key Themes

    • Stock market volatility around the globe weighed on investment returns, but broad diversification across asset classes benefited investors.
    • Defensive asset classes such as cash, gold, Treasuries and international bonds played their role amid stock volatility.
    • Interest-rate sensitive asset classes such as bonds and real estate investment trusts (REITs) led in performance as the Federal Reserve held off on raising short-term rates.
    • Tax-loss harvesting demonstrated its potential benefit as market volatility led to a surge in tax-loss harvesting trades for clients enrolled in the service.
    • The automated approach with human oversight of Schwab Intelligent Portfolios® avoided the short-term trading disruptions that occurred on stock exchanges on August 24.

    How did financial markets do?

    Stocks tumbled around the globe during the third quarter as volatility that began in emerging markets such as Greece and China spread to the U.S. and other developed markets. The potential benefits of the broad diversification within Schwab Intelligent Portfolios2 was highly evident during the quarter, as financial market volatility surged to levels last seen in 2011.

    Emerging market stocks led declines

    As illustrated in Table 1, emerging market stocks saw the weakest performance during the quarter. Slower economic growth in China; continued uncertainty in Greece; price weakness among industrial commodities such as oil, iron ore and copper; and severe recessions in countries such as Brazil and Russia all contributed to emerging market declines.

    Although emerging markets have been weak recently, they can be an important part of a diversified portfolio due to higher expected returns over time and lower correlations relative to developed market stocks. However, higher volatility comes with the territory. That's why emerging market stocks are included within Schwab Intelligent Portfolios, but at relatively moderate weightings that range from 1% to 10% across the risk spectrum.

    Broad diversification helped investors

    U.S. stocks did better than emerging markets during the third quarter, but did not escape the volatility. The S&P 500 Index posted its first negative quarter since 2012 and its first "correction," a decline of at least 10% from recent highs, since 2011. Asset classes such as REITs and various bond asset classes provided positive returns, helping partially offset declines in stocks.

    Questions about the potential timing of the first Federal Reserve interest rate increase in nearly a decade contributed to the volatility during the quarter. The Fed ultimately opted not to raise rates in September, citing the global volatility and continued low inflation in the U.S., pushing the first potential increase in rates to October or December. Despite the market volatility, the U.S. economy continued to show signs of strength, with unemployment falling to 5.1% in August, the lowest in seven years, and Q2 gross domestic product growth (GDP) of 3.9%.

    Defensive asset classes prove their mettle

    Defensive asset classes such as cash, gold, international bonds and U.S. Treasury bonds played their role of providing stability and diversification during the quarter's volatility. International bonds and U.S. Treasury bonds delivered positive returns and were among the strongest performing asset classes during the quarter. Cash provided its intended stability, demonstrating why we included it within Schwab Intelligent Portfolios. And gold, although down moderately for the quarter, was the strongest performing asset class during the peak of the volatility in August, rising nearly 3% as stocks tumbled.

    Table 1: Market Performance (Ranked by Q3 2015 total return)
    Total Returns (%)
    Asset Class Q3 Sept Aug July
    U.S. real estate investment trusts (REITs) 5.6 -6.2 3.1 2.1
    U.S. Treasury bonds 0.6 0.1 1.0 1.7
    Securitized bonds 0.6 0.1 0.6 1.3
    International developed market bonds -0.1 0.4 0.4 0.6
    Cash 0.00 0.01 0.01 0.01
    Gold and other precious metals -6.6 2.9 -1.4 -5.2
    U.S. stocks 2.1 -6.0 -2.5 -6.4
    International developed market stocks 2.1 -7.4 -5.1 -10.2
    Emerging market stocks -6.9 -9.0 -3.0 -17.9

    Source: Morningstar Direct, as of September 30, 2015. Performance figures shown are total returns for each asset class during the designated period. Indexes used are U.S. REITs, S&P United States REIT Index; U.S. Treasury bonds, Barclays U.S. Treasury 3 – 7 Year Index; securitized bonds, Barclays U.S. Securitized Index; international developed market bonds, Barclays Global Aggregate Ex-U.S. Index; cash, Barclays Short Treasury 1 – 3 Month Index; gold, S&P GSCI Precious Metals Index; U.S. stocks, S&P 500 Index; international developed market stocks, MSCI EAFE Index; emerging market stocks, MSCI Emerging Markets Index. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

    How did Schwab Intelligent Portfolios do?

    Declines in many asset classes resulted in negative portfolio returns across the risk spectrum for the quarter. As would be expected in this environment, more conservative portfolios benefited from their larger allocations to cash and bonds, while more aggressive portfolios saw bigger declines as a result of their higher allocations to stocks.

    In even the most aggressive portfolios, however, allocations to defensive asset classes helped temper declines. Diversification provided by asset classes such as U.S. REITs also generated positive returns, helping offset declines in stocks.

    Tax-loss harvesting trades surged amid volatility

    As would be expected, the number of daily tax-loss harvesting trades for clients who have enrolled in the service rose significantly as market volatility increased during August. Approximately 88% of clients enrolled in tax-loss harvesting saw at least one tax-loss harvesting trade during the last week of August, capturing losses caused by short-term volatility that potentially may be used to offset taxable capital gains from the sale of other investments during the course of the year.3

    Automated analysis with human oversight helps ensure efficient trading

    Despite the short-term trading halts on stock exchanges for some stocks and ETFs at the peak of the market volatility on August 24, Schwab Intelligent Portfolios continued to trade efficiently. While the power of technology enables the efficiency of automated portfolio construction and monitoring, human oversight is also part of the program. This is the case every day, not just during volatile periods. This human touch means that trades are not automatically implemented during periods when markets might not be operating properly. Instead, we are able to decide when and how to trade to ensure that markets are functioning properly and that we consistently focus on executing trades in the best interest of our clients.

    1. This quarterly commentary is designed to provide you with insight into the market environment during the quarter. How your portfolio performed is dependent upon your asset allocation across the risk spectrum from conservative to aggressive, as well as criteria such as when you opened your account, the timing of any deposits/withdrawals, timing of portfolio rebalances, whether you are enrolled in tax-loss harvesting and other criteria.

    2. Schwab Intelligent Portfolios is built on a foundation of asset allocation and broad global diversification, with 28 asset classes included in the program and up to 20 asset classes in any single portfolio.

    3. Tax-loss harvesting is available for clients with invested assets of $50,000 or more in the Schwab Intelligent Portfolios account. Clients must enroll to receive this service.

    The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

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

    You should read the tax-loss harvesting disclosures on the Website and in the Brochure before choosing the tax-loss harvesting feature if you decide to enroll in Schwab Intelligent Portfolios. Neither the tax-loss harvesting strategy for the Schwab Intelligent Portfolios program nor any discussion herein is intended as tax advice. Neither Charles Schwab & Co., Inc. (“Schwab”) nor its affiliates, including but not limited to Charles Schwab Investment Advisory, Inc. represent that any particular tax consequences, benefits, or outcomes will be obtained.

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

    (0318-8J2V)


    Was this article helpful?

    Next Steps

    1. Open an account
    2. Log in
    3. Learn more about Schwab Intelligent Portfolios®
    4. Tips for smart investing

    5. Contact a Schwab investment professional to discuss your goals:

    6. Live chat now
    7. Call us at 855-694-5208