Archives For November 2009

Last week, I mentioned that Schwab was introducing several new exchange-traded funds and that what was going to set these apart from the other ETFs was that they were going to trade commission-free to Schwab clients. Lucas, a reader and fairly frequent commenter on this blog read the prospectus and found this interesting tidbit of information pertaining to 12b-1 fees (located on page 5 of the prospectus):

The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets. However, the Board has determined that no such fees will be charged prior to November 14, 2011 (more than 12 months from the commencement of the fund’s operations).

I wanted to clarify this information so I sent my Schwab contact the following email:

On page 5 of the ETF prospectus, the following note is attached to 12b-1 fees:

The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets. However, the Board has determined that no such fees will be charged prior to November 14, 2011 (more than 12 months from the commencement of the fund’s operations).

What does this mean exactly? Does it mean that Schwab is reserving the right to charge 12b-1 fees on the ETFs or is it their intention to do so at some point in the future?

He forwarded my email to the appropriate person and this is the answer I received:

I understand that you had a question about our ETFs and 12b-1 fees. I just want to be clear that Schwab ETFs do not charge 12b-1 fees and there is currently no intention to assess such fees in the future. Maintaining the ability to begin a 12b-1 plan in the future is common industry-wide practice and intended to provide the flexibility that may be needed to address future unexpected significant industry developments.

Jon De St Paer
Vice President, Investment Management Strategy
Charles Schwab

They left the window open just in case…

That’s the information I got. You can take it for what it’s worth. Thanks for the catch, Lucas.

The S&P 500 Total Return Index sits at 1795.12. It’s up 5.55% for the month of November and 23.55% for the year.

The S&P Midcap 400 is up 5.61% for November (31.58% YTD) and the S&P Smallcap 600 is 49.93% for the month and 18.21% YTD.

Just a little FYI for you.

As if we don’t have enough government programs as it is…

MSN Money posted an article over the weekend titled, Junior’s 1st Paycheck: $500 at Birth.

I wrote about this program, called ASPIRE, in the past. The goal of ASPIRE is to give EVERY newborn baby a $500 savings account to be used for college, buying a home, or retirement. Babies born into lower-income families can receive more than $500. How much more? $500 for a total of $1,000.

Regardless, let’s focus on the $500. How much could $500 be worth by the time the recipient is ready for college? Not a lot, as my math shows:

Assuming a 10% rate of return (7% after inflation)…

$500 × (1.07)18

$500 × 3.38

$1,690

That’s right…$1,690! Yes, this is assuming nothing is added to the account over the years, which is a pretty safe assumption unless the government adds money to the account.

Sure, $1,690 is better than nothing I suppose but what good is it going to do for the recipient? Is it 10% down on a $16,900 house? A semester’s worth of books?

Say the account stays untouched until the recipient retires at age 65. How much will it be worth by then—again assuming nothing is added to the account and we use the same expected returns from the above example?

$500 × (1.07)65

$500 × 81.27

$40,635

The MSN Money article I referred to above mentions the reasoning behind this act:

“Having an asset has the potential to change the way people think and plan for their future, and sometimes those effects can be generated just from small asset holdings,” he says, adding that it’s possible for people to build significant savings over time. The ASPIRE Act also would pair the creation of the accounts with financial literacy programs in schools.

I looked up the ASPIRE Act and this is what it says about financial literacy:

The Secretary of the Treasury, in coordination with the Financial Literacy and Education Commission, shall develop programs to promote the financial literacy of account holders of KIDS Accounts and the legal guardians of such account holders who have the rights with respect to such accounts under section 3(h).

Not a lot of focus on financial literacy!

If we REALLY WANT TO HELP PEOPLE we need to be teaching them financial literacy, not giving them $500 or $1,000.

Not only that, with our country mired in debt that is in the trillions, what good is it to allocate roughly $2.1 billion (4.2 million kids born in 2008 × $500) to savings accounts? Doesn’t make a lot of sense to me.

Fannie Mae is becoming a landlord…

Fannie Mae will allow homeowners facing foreclosure to stay in their homes and rent them for as long as a year, as part of the government’s latest effort to help troubled borrowers, while keeping more foreclosed properties from hitting the housing market.

The “Deed for Lease” Program lets borrowers who don’t qualify for loan modifications transfer their property to Fannie Mae in exchange for a lease. Borrowers-turned-tenants will pay market rents, which in most cases are lower than the cost of mortgage payments, and might be offered extensions when their leases expire.

That’s what I read in today’s WSJ. You can read the article here.

The supposed goals of this program are to:

1. Allow people to stay in their homes by giving them rent payments that are lower than their mortgage payments.

2. Keep foreclosed houses from flooding the housing market with excess inventory.

3. Possibly allow Fannie to profit from the eventual sale of the homes when the real estate market recovers.

Fannie will hire a professional management company to handle all the rental details.

Basically, what this means is that since our government essentially owns Fannie Mae, our government is now a landlord. So much for property rights. Kinda scary if you ask me.

What do I think should happen?

Allow the market to address the housing situation instead of artificially propping it up until who knows when. Attack the situation like you do when ripping off a bandaid…one quick motion.

Back in August, my wife and I went to see Chris Isaak in concert. It was awesome! If you get the chance to see Chris in concert, GO! Anyway, below is a live video of my favorite song from his newest CD, “Mr. Lucky.” Enjoy…

Charles Schwab recently announced that they were getting into the exchange-traded funds game by introducing several new Schwab-branded ETFs. I have listed the new ETFs below, along with their expense ratio and the description as provided by Schwab. What makes these particular ETFs interesting is that they will trade commission-free to Schwab clients. Of course, free doesn’t mean that they won’t have spreads—the difference between the bid and ask price—but they won’t have the traditional brokerage commissions that are paid when buying or selling other ETFs.

The intial list is slim but I expect that new offerings will be added with time.

Domestic Equity ETFs

Schwab U.S. Broad Market ETF™ SCHB – 0.08%
Offers diversified exposure across large-, mid- and small-cap U.S. stocks. Seeks investment results that track performance, before fees and expenses, of the approximately 2,500-stock Dow Jones U.S. Broad Stock Market Index(SM).

Schwab U.S. Large-Cap ETF™ SCHX – 0.08%
Provides exposure to large-cap U.S. companies. Seeks investment results that track the performance, before fees and expenses, of the Dow Jones U.S. Large-Cap Total Stock Market Index(SM) made up of approximately the largest 750 U.S. stocks.

Schwab U.S. Large-Cap Growth ETF™* SCHG – 0.15%
Provides exposure to large-cap U.S. stocks that exhibit growth style characteristics. Seeks investment results that track the performance, before fees and expenses, of the Dow Jones U.S. Large-Cap Growth Total Stock Market Index(SM), representing approximately half of the market capitalization of stocks in the Dow Jones U.S. Large Cap Total Stock Market Index(SM).

Schwab U.S. Large-Cap Value ETF™* SCHV – 0.15%
Provides broad exposure to large-cap U.S. stocks that exhibit value style characteristics. Seeks investment results that track the performance, before fees and expenses, of the Dow Jones U.S. Large-Cap Value Total Stock Market Index(SM), representing approximately half of the market capitalization of stocks in the Dow Jones U.S. Large Cap Total Stock Market Index(SM).

Schwab U.S. Small-Cap ETF™ SCHA – 0.15%
Offers exposure to small-cap U.S. companies. Seeks investment results that track the performance, before fees and expenses, of the Dow Jones U.S. Small-Cap Total Stock Market Index(SM), made up of approximately 1,750 U.S. small cap stocks.

International Equity ETFs

Schwab International Equity ETF™ SCHF – 0.15%
Provides broad exposure to international large-and mid-cap companies in over 20 developed international markets. Seeks investment returns that track the performance, before fees and expenses, of the FTSE Developed ex U.S. Index made up of approximately 1,400 international stocks.

Schwab International Small-Cap Equity ETF™* SCHC – 0.35%
Offers diversified exposure to international small-cap companies in over 20 developed international markets and seeks investment results that track the performance, before fees and expenses, of the FTSE Developed Small Cap ex U.S. Liquid Index made up of approximately 1,800 international small cap stocks.

Schwab Emerging Markets Equity ETF™* SCHE – 0.35%
Offers diversified exposure to large- and mid-cap companies in over 20 emerging markets. The ETF seeks investment results that track the performance, before fees and expenses, of the approximately 740-stock, FTSE All Emerging Index.

It will be interesting to see if Schwab puts pressure on the competition to lower their ETF fees. It will also be interesting to see if Schwab somehow integrates these ETFs into their 401(k) offerings.

Related:

The Schwab Guide to ETFs

*Available in December

Yesterday I used the RATE function in Excel for a post. A reader asked me if I could explain the RATE function. This post will attempt to do that.

First off, you use the RATE function when you want to calculate what rate of return would be required to meet a certain goal, based on a few assumptions. Let’s use the information from yesterday’s post:

Retirement Goal: $1,000,000
Years until retirement: 20 (240 months)
Current retirement account balance: $100,000
Monthly contribution amount: $500

You can set it up like this in Excel:

Excel RATE Function - 1

Then, to solve for the rate, you simply put your click on cell E1 and then choose Insert > Function from the menu. You should then see this:

Excel RATE Function - 2

If you don’t see the RATE function listed in the center menu, then you might need to select “All” from the drop down menu above and then scroll down in the main menu until you see RATE.

Once you click on RATE and then “Okay”, you’ll see a menu that looks like this:

Excel RATE Function - 3

Then, you simply fill in the information, referencing the appropriate cells like this:

Exel RATE Function - 4

Here’s a quick explanation of each input:

Nper – the number of periods involved in this example. It’s 20 years but we’re making monthly contributions, so it’s more accurate to use 240 months. So we reference cell C1 and multiply it by 12.

Pmt – the monthly contribution amount expressed as a negative number. Think of it like a cash flow amount. The $500 is flowing out each month. So, we reference cell D1 and multiply it by -1 to get a negative number.

Pv – the present value of the retirement account—again expressed as a negative number. We reference cell A1 and multiply it by -1.

Fv – the future value of the retirement account. This value is expressed as a positive number. We reference cell B1.

Type – input 1 if the payment is made at the beginning of the month or 0 or leave it blank if the payment is made at the end of the month. I chose the beginning of the month and therefore inserted 1.

Guess – (you’ll have to scroll down to see this input as it is located under Type) This function requires a rate guess in order work properly. The default is 10 percent. I left this blank.

After you enter all the necessary information, click “OK.” You should see .78%, although you might see 1%. In that case, simply go into cell format and change the number settings to two decimal places.

Also, the formula will give you a monthly return. To convert it to an annual number, simply convert the percentage to a decimal and raise that number to the 12th power. Like this:

(1 + .0078)12– 1

(1.0078)12– 1

1.09786 – 1

.09786 or 9.79%

Hopefully, if I have done a good job, you now know how to use Excel’s RATE function. If you have any questions, please feel free to leave a comment.