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

If a stock goes down 10%, it takes a return greater than 10% just to get back to the original price. To illustrate that point, take a look at this graphic:

So, if an investment goes down 10%, it takes a return of 11.11% just to get back to the original amount.

Now let’s say at the beginning of the year you were looking for a 10% return on your investment over the next year. But, on January 4th, you already found yourself down 10% on the year. What kind of return would you need to get so that you still received a 10% rate of return over the year? The answer is a whopping 22.22%!

Pretty amazing isn’t it? It will be interesting to see where some of those ETFs finish for the year.

Although the graphic doesn’t mention it, 15 ETFs are down over 10%.

This isn’t a fun way to start off the year.

To Lily’s excellent analysis, I might add that one thing I like about ETFs is that they can be sliced and diced (if slicing and dicing is your cup of tea) in ways that mutual funds cannot (read this post to see what I’m talking about), which can allow an investor to create customized portfolios.

So, if you’re interested in reading a comparison of index mutual funds and ETFs, check out The Honest Dollar. While you’re there, check out the rest of her posts. Her blog’s fairly new but I like what I have seen so far.

Unfortunately, I think my post was misunderstood as my endorsement of a strategy based solely on this year’s performance alone. I would never recommend anything based on 9 months worth of history.

Anyway, I promised to show you how my “strategy” performed in the past. Unfortunately, we don’t have a lot of history to go by since the iShares sector funds (the only way to invest in such a strategy) have only been around since 2000. That said, here’s a year-by-year ranking of the ten iShares DJ Sector funds along with the iShares DJ Total Market Index fund (IYY) as well as the strategy (Portfolio). You can click on the graphic to see a larget PDF.

And here’s a year-by-year comparison of the returns of IYY vs. the Portfolio BEFORE fees:

The strategy assumed that all dividends were reinvested and that the portfolio was rebalanced at the end of each year. The above graphic DID NOT include transaction costs so, I re-ran the numbers to include transaction costs. I assumed that the portfolio was housed at FOLIOfn under their basic plan, which costs $199 per year but gives account holders “free” trades each month. I did not factor in a transaction cost for trading IYY since it would only be purchased at the beginning of the hypothetical and would never need to be rebalanced. I also assumed that this strategy would be used inside an IRA so taxes weren’t an issue.

So, what did I find out? Well, on a smaller account of $10,000, you would have been better off investing in the iShares DJ Total Market Index fund rather than using the strategy. Why? Transaction costs! It turns out that the $199 annual portfolio fee really ate into the returns:

You might be saying to yourself, “That’s it! Game over! JLP’s strategy sucks!”

Well, not necessarily. You see, the strategy worked much better with a larger portfolio:

Using the strategy on a $100,000 portfolio shows that the strategy portfolio was worth nearly $10,000 more than the IYY portfolio. That’s because the $199 annual transaction cost was a much smaller hurdle to overcome.

This brings us back to the points I made at the end of the previous post: taxes and transaction costs are very important when making portfolio choices.

One final note before we end this thing: I did not include fixed income or international funds in this illustration. My intent was to only look at the total market index and the ten sectors that make up the index. This post is also not an endorsement of any strategy. Invest at your own risk.

UPDATE: Andy left an interesting comment below about how maybe the equal-weighted sector portfolio performed better because it had more value stocks or small-cap stocks. I went back and did some analysis and here’s what I found out:

As you can see from the chart, the size weightings didn’t change much at all. So, that tells us that any performance difference between the total market index and the sector portfolio was due to the sector allocations themselves. This makes sense to me since sectors are always falling in and out of favor and weighting the sectors equally allows a portfolio to take advantage of that fact.

Notice anything significant about that allocation? I’ll give you a hint: it’s the fact that over 17% of the fund is allocated to the financial sector. Unfortunately, financial stocks have been hammered this year. It shows in the performance of IYY, which is up around 4.97% YTD at the time of this writing.

That’s why I prefer to invest equal amounts in the ten sector funds that make up the total market index. As the table below shows, it’s impossible to know which sectors are going to perform the best from one year to another:

The equal allocation strategy would have worked out nicely this year since it limited the exposure to the financial sector to just 10% of the portfolio. Here’s the numbers for 2007:

Please note that this strategy might involve greater transaction costs since you are buying 10 funds instead of just the one fund. So, transaction costs need to be considered before going with this strategy. One way around these transaction costs is to use a low-cost brokerage firm or even a brokerage account that charges a flat fee like FOLIOfn. Still these options are only helpful if you have a decent-sized account.

Another factor to consider is taxation on the buying and selling of the sectors if the portfolio is held in a taxable account. Therefore, it’s probably best to use this sort of strategy inside a tax-sheltered account like an IRA or Roth IRA.

In a follow-up post, I’ll show you how the rebalanced portfolio performed over the years. Stay tuned…

Use index mutual funds for accounts you’re regularly adding to or drawing on, while stashing longer-term money in exchange-traded index funds. That combo should trim your investment costs — and further boost your fund returns.

This idea has merit because exchange-traded funds typically have lower management expenses than mutual funds. The only problem is that exchange-traded funds trade like stocks, which means there are transaction expenses. Of course there are ways to reduce transaction charges by using a low-cost broker like Scottrade. Scottrade charges $7 per trade but will only trade full shares. Another route you could go is to open a basic account with FOLIOfn, which run $199 per year but gives you 200 trades per month on a select list of companies. On a small account $199 per year is pretty steep but gets more reasonable as the size of the account increases.

Account size also weighs in with mutual funds as most mutual fund companies have account minimums. One way around this is to set up an account and do monthly direct deposits into the account. Then as the account grows more options will open up to you.

One thing I have always liked about ETFs is their simplicity and the ability to set up portfolios the way I want them set up. For instance, I like the ability to break down the Dow Jones Total Market Index into ten sectors and invest an equal amount in each sector. I can do this with iShares ETFs but not with mutual funds.

Anyway, it is something to think about. I like to look at index mutual funds and exchange-traded funds as tools. One tool may work perfect for one job but be totally useless for another job. It’s better to have a tool box full of tools.

His point? There’s too many exchange-traded funds (ETFs as most people now call them). As the article states from Morningstar, there are:

39 ETFs focused on healthcare

32 ETFs focused on technology

35 ETFs focused on naturual resources

22 ETFs focused on the financial sector

Do we really need that many? If not, which ones will stay around for the long-term.

Jim Wiandt of IndexUniverse says that an ETF’s long-term existence isn’t secure until it reaches $200 million in assets. Why? Because any less than that and the fund may not be able to cover all their expenses. Clements goes on to suggest sticking with companies like Barclays (iShares) and Vanguard becuase of their reputations.

Personally, I would stick to basic low-cost ETFs focused on indexing and ignore the rest. Oh, and for the record, I checked and every ETF I follow in my portfolios meets the $200 million threshold (I’ll be updating the portfolios later today).

QUESTION: Is now the time to invest new money in mutual funds? I’ve been sitting on $100,000 for over a year because the market has been climbing to historic highs. I have always been told to buy low and sell high, so do you think I should wait for the correction before I invest this money. Or should I just invest it now?

– Mike B., Memphis, Tenn.

Poor guy.

The S&P 500 Index was up 15.8% last year, while the Dow Jones Industrial Average was up 19.05%. And that’s not even including this year’s numbers, which are up too. This guy could be sitting on $115,000 or more had he just had the guts to make a move. Of course all this means that the market is a lot higher than it was a year, which probably makes this guy even more leery about getting into the market.

One thing he could consider doing is dollar-cost-averaging into a diversified portfolio of index mutual funds or exchange-traded funds. I know lots of people don’t like dollar-cost-averaging but for people like this guy it makes sense. He could ease into the market over a one or two year period. The risks of this strategy?

1. The market could continue going up, which means he would lose out on the growth of the money that’s not yet invested.

2. The market could go down, reducing the amount that he has invested but would mean each additional purchase would be buying lower-priced shares.

I have to wonder that if the market fell, would this guy have the guts to get in? Or, would he think the market was going to fall further and wait? What happens if the market falls 10% and he waits for it to fall further but the market turns around and moves up 15 – 20% or more? See how this stuff can really start playing with your mind if you let it?

There are no easy answers when it comes to investing. You just have to do it.

For those of you who may not be familiar, a preferred stock is essentially a hybrid between a bond and a stock. It’s not quite as safe as a bond, but preferred dividends must be paid before common stock dividends. So, there is some safety involved. For more information, see this definition I found on InvestorWords.com.

As of this writing, financials make up 82.5% (or 23 out of the 29 securities) in the fund, so it’s not exactly diversified.

For more on preferred stocks, you might want to check out these sources I found:

Standard & Poor’s Preferred Stock Primer (PDF)

Standard & Poor’s U.S. Preferred Stock Index Fact Sheet (PDF)