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Investing Specialists

How Our Schwab Tax-Efficient Retirement Saver Portfolios Have Performed

With hefty weightings in low-cost equity ETFs, these portfolios have notched strong gains.

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I recently made significant adjustments to my core tax-deferred Retirement Saver portfolios for Schwab supermarket investors, the result of a flurry of manager changes, closures, and analyst downgrades that occurred since the portfolios' launch three years ago.

When it comes to enacting changes in any of the Schwab tax-efficient portfolios, however, I'll use a much lighter hand. In contrast to investing within a tax-sheltered account like an IRA, where you're free to make adjustments without tax consequences, trading within a taxable account can entail tax costs. The tax consequences of trading may be less (or not at all) onerous in down markets, but they can stack up after the type of sustained equity-market rally we've experienced over the past few decades.

The tax-efficient portfolios are designed to limit turnover; they're ultraminimalist. The equity components of the portfolios are composed of fine Schwab total market ETFs, which are the ultimate in "set it and forget it" ease. I don't foresee ever needing to make changes to those holdings. The municipal bond funds in the portfolio are actively managed and highly rated by Morningstar's analyst team.

Thus, I didn't see any reason to make any changes to these portfolios following my recent review. Yet the three-year mark for the portfolios is a good point to stop and take stock of performance. Thanks to terrific gains from total U.S. stock market trackers like  Schwab US Broad Market ETF (SCHB), as well as the fact that the taxable portfolios contain slightly more equity exposure than the tax-deferred portfolios, the tax-efficient portfolios all gained more than the analogous tax-deferred Schwab Bucket portfolios. The tax-efficient portfolios also successfully limited the drag of taxes: Even the least tax-efficient of the three portfolios ceded less than 50 basis points to taxes on an annualized basis over the past three years.

How to Use the Portfolios
As with the other portfolios, I used Morningstar's Lifetime Allocation Indexes to guide the asset-class exposures for these Schwab portfolios. To help populate the portfolios with specific funds, I leaned on Morningstar's medalist ratings and input from Morningstar's analyst team. Because the portfolios are designed for taxable accounts, I used a combination of exchange-traded funds for equity exposure and municipal bond funds for bond exposure.

Investors should use their proximity to retirement to help determine which portfolio is the best fit for them, while also taking into consideration the presence of other income sources they'll be able to rely on during retirement. To use a simple example, a 55-year-old investor with a pension that will provide all of her in-retirement income needs could reasonably employ the Moderate or even Aggressive versions, assuming she has a high risk tolerance to match her high risk capacity. (This article explains the important difference.)

At the opposite extreme, a 30-year-old who enters a high-anxiety state during volatile markets might employ the Moderate portfolio, even though his time horizon is long enough to support a higher equity weighting.

Aggressive Tax-Efficient Retirement Saver Portfolio for Schwab Supermarket Investors
60%:  Schwab US Broad Market ETF (SCHB)
25%:  Schwab International Equity ETF (SCHF)
5%:  Schwab Emerging Markets Equity ETF (SCHE)
10%:  BlackRock National Municipal (MDNLX)

Performance
3-Year Annualized Return: 12.81%
3-Year Tax-Cost Ratio (Portfolio): 0.48%

The Aggressive Schwab Supermarket Retirement Saver Portfolio returned nearly 13% on an annualized basis over the past three years. Its biggest gains came from Schwab US Broad Market, which returned nearly 17% on an annualized basis over the trailing three-year period. Like all index products that are weighted by stocks’ market value, the ETF has sizable positions in some of the best-performing stocks in the U.S. market, including  Amazon (AMZN),  Apple (AAPL), and  Microsoft (MSFT). Those heavy weightings have the potential to work against it and other similarly positioned index funds in a market sell-off led by technology-related names.

Changes
None.

Moderate Retirement Saver Portfolio for Schwab Supermarket Investors
55%: Schwab US Broad Market ETF
20%: Schwab International Equity ETF
5%: Schwab Emerging Markets Equity ETF
20%: BlackRock National Municipal

Performance
3-Year Annualized Return: 11.80%
3-Year Tax-Cost Ratio (Portfolio): 0.43%

With an 80% equity position, the bulk of it in Schwab US Broad Market, this portfolio's performance nearly kept pace with that of its Aggressive counterpart. BlackRock National Municipal posted muted gains over the trailing three-year period, like most high-quality bond funds. But its relative results were strong and it recently received a ratings upgrade, to Silver from Bronze.

Changes
None.

Conservative Retirement Saver Portfolio for Schwab Supermarket Investors
50%: Schwab US Broad Market ETF
12%: Schwab International Equity ETF
3%: Schwab Emerging Markets Equity ETF
20%: BlackRock National Municipal
15%:  Wells Fargo Short-Term Municipal Bond (WSTMX)

Performance
3-Year Annualized Return: 7.13
3-Year Tax-Cost Ratio (Portfolio): 0.34%

Changes
With just 65% of its assets in equities, this portfolio’s returns were meaningfully below those of its Aggressive and Moderate counterparts. It was the most tax-efficient of the three portfolios, however, as its bond holdings' tax-cost ratios were at or near 0%. 

Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.