ETFs October 19, 2017

    Do you ever look at an investment’s performance and think your return was lower (or higher) than the reported percentage figure? The fact is, there’s more than one way to calculate return. And you may not be calculating time-weighted return—the method best used to compare investment managers who don’t control the timing of deposits and withdrawals.

    Time-weighted return (TWR) is the industry standard for managed portfolios and market indexes

    We believe that the TWR methodology best represents the true performance of your portfolio because it solely reflects the effects of the market and the investment choices made for you.

    Other calculation methods—including your personal rate of return (PRR)—can be skewed by the size and timing of account inflows and outflows, decisions that clients control.

    That said, personal return is still a useful value to consider as the bottom line monetary impact of your investment. And Schwab Intelligent Portfolios® clients can still see their personal return as a dollar amount on the Portfolio Performance dashboard, but return percentage is shown as a TWR calculation.

    TWR vs. PRR in action

    To better understand different calculation methods, let’s consider two examples:

    Meredith invests $12,000 into the Vanguard S&P 500 Index ETF (ticker symbol VOO) at the closing price of $186.93 per share on 12/31/2015 and doesn’t make any more deposits for the year. So she purchases 64.1952 shares. The value of those shares at the close of business on 12/30/2016 is $205.31 per share, or $13,179.92 total—representing a 9.83% gain.1

    Kathryn, on the other hand, invests just $6,000 at the closing price on 12/31/2015. So she purchases 32.0976 shares. On 6/30/2016, when the closing share price is $192.20 per share, her initial investment is worth $6,168.85.

    Then Kathryn invests another $6,000 at that closing price, buying 31.2175 more shares. At the end of the year, she’s purchased a total of 63.3135 shares— a smaller overall number of shares than Meredith with the same $12,000 total investment.

    So at the closing share price of $205.31 on 12/30/2016, the value of Kathryn’s account is $12,998.89. This represents a gain of $998.89. And if we just calculate her personal rate of return, she ends up with $998.89 / $12,000 = 8.32%.

    The timing of the deposits affected Meredith and Kathryn’s seemingly different rates of return. And that difference doesn’t reflect the investments’ performance well, since investors can buy and sell at different times throughout the year.

    But now suppose we calculate Kathryn’s time-weighted return. This calculation recognizes the timing of cash flows—and that the first $6,000 was invested for the full year while the other $6,000 was invested for only half of the year. In that case, we get nearly the same value as in Meredith’s one-time-contribution scenario:

    First 6 months’ return: ($6,168.85 − $6,000) / $6,000 = 2.81%
    Second 6 months’ return: ($12,998.89 – ($6,168.85 + $6,000)) / ($6,168.85 + $6,000) = 6.82%

    Time-weighted return: (1 + 2.814%) × (1 + 6.821%) − 1 = 9.82%

    So Meredith and Kathyrn’s time-weighted return is the same, even though their personal returns differ by $181.03.

    Understanding time-weighted return can help you evaluate and compare performance fairly, while knowing your personal return, as a dollar value, tells you exactly how your investment has impacted your wallet.

    How Schwab Intelligent Portfolios can help

    Schwab Intelligent Portfolios makes sure you’re always up to date about your portfolio’s performance. Here are a few ways we keep you informed:
    • Every week: Unless you opt out, we send you an email highlighting your portfolio’s time-weighted return—for the week, the month and the year to date.
    • Every quarter: We post a market performance analysis to this blog.
    • Anytime: You can log in to your account and view your Portfolio Performance dashboard—and see both your time-weighted return percentage and your personal return as a dollar value.

    1. Assumes no dividend reinvestment.


    The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

    All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions.

    Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

    (1017-70GS)


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