Performance July 8, 2016

    Key Themes

    • Global financial markets saw a quick rebound after Britain's surprise vote to leave the European Union sparked volatility.
    • Despite the volatility, most asset classes delivered positive returns for both Q2 and the first half of 2016, underscoring the importance of staying focused on your long-term plan.
    • Investors benefited from diversification across non-traditional asset classes, such as gold and other precious metals, real estate investment trusts (REITs) and high-yield bonds.
    • Fundamentally weighted indexes added significantly to the performance of Schwab Intelligent Portfolios™ during Q2 and the first half of 2016.

    How did financial markets do in Q2?

    The second quarter brought a renewed bout of volatility after Britain shocked markets by voting the leave the European Union. A sharp sell-off across global markets in response to the "Brexit" vote was followed by a quick rebound. The rapid recovery served as a reminder of the importance of avoiding emotional decisions when markets become turbulent, and staying focused on your longer-term plan.

    International developed market stocks bore the brunt of the sell-off, but ended the quarter with a small decline of 1.5%, as illustrated in Figure 1. U.S. large-cap stocks saw a more moderate decline during the sell-off and rose 2.5% for the quarter, while U.S. small-cap stocks gained 3.8% during Q2.

    Despite the short-term volatility among stocks, almost all asset classes delivered positive returns for the quarter. The broad diversification of Schwab Intelligent Portfolios benefited investors, as non-traditional investments—such as U.S. REITs (+6.6%) and high-yield bonds (+5.0%)—were among the top contributors to performance.

    Defensive asset classes again demonstrated their diversification benefit, helping to moderate overall portfolio declines during the sell-off after the "Brexit" vote. Gold surged 8.1% for the quarter, adding to already sizable gains for the year. International developed market bonds (+3.4%) and U.S. Treasury bonds (+1.5%) each added positive returns, while cash provided its intended balance.

    Figure 1: Market performance (ranked by Q2 2016 total return)
    Total returns (%)
    Asset class Apr May Jun Q2
    Gold and other precious metals 5.6 -6.3 9.3 8.1
    U.S. real estate investment trusts (REITs) -2.5 2.2 7.0 6.6
    High-yield bonds 3.9 0.5 0.6 5.0
    U.S. small-cap stocks 1.6 2.2 -0.1 3.8
    Investment-grade corporate bonds 1.4 -0.1 2.2 3.6
    International bonds 2.0 -2.4 3.8 3.4
    U.S. large-cap stocks 0.4 1.8 0.3 2.5
    U.S. Treasury bonds -0.1 -0.2 1.8 1.5
    Emerging market stocks 0.5 -3.7 4.0 0.7
    International developed market stocks 2.9 -0.9 -3.4 -1.5

    Source: Morningstar Direct, as of June 30, 2016. Performance figures shown are total returns for each asset class during the designated period. See disclosures for indexes used. Past performance does not guarantee future results. Indexes are unmanaged and cannot be invested in directly.

    Diversification has benefited investors in 2016

    Most asset classes delivered positive returns in the first half of 2016, in spite of a rocky beginning and end to the time period. As illustrated in Figure 2, gold was the strongest performer, with a gain of 25.4%. That was followed by U.S. REITs, which ended the first half up by 13.3%. Diversifying bond holdings across asset classes—such as international bonds, emerging market bonds and high-yield bonds—also benefited investors, as they were among the best performers.

    Market volatility has been concentrated in stocks, helping illustrate the benefits of the broad global diversification of Schwab Intelligent Portfolios. Despite the volatility, U.S. large-cap stocks rose 3.8% in the first half of the year, while U.S. small-cap stocks gained 2.2%. Emerging markets were the top performers among stocks, with a gain of 6.4%—helped by a slightly weaker U.S. dollar and stronger oil prices. The biggest detractor was international large-cap stocks, which declined 4.4%.

    Market Performance

    Fundamental index strategies in the portfolios continued to outperform

    Fundamental index strategies' outperformance over market-cap indexing grew during Q2, boosting overall portfolio performance so far in 2016. For the first half of the year, fundamental indexing led by approximately three to nine percentage points across the five major equity asset classes. Outperformance was especially strong in emerging market stocks, where fundamental indexing rose 15.4% compared with 6.4% for its market-cap counterpart—making it one of the top-performing asset classes during the first half of 2016.

    The inclusion of both market-cap and fundamentally weighted ETFs is a unique feature of Schwab Intelligent Portfolios. The way that various market environments tend to favor each of these forms of index investing at different times has been evident in 2016, validating our belief that investing in both can help to enhance the diversification benefits within your portfolio.

    Fundamental index strategies

    How did Schwab Intelligent Portfolios do?

    The broad diversification of Schwab Intelligent Portfolios helped dampen the volatility among stocks during the quarter. All portfolios across the risk spectrum delivered positive returns for Q2 and the first half of 2016. Performance was led by moderately aggressive portfolios, which saw smaller declines than the most aggressive portfolios during the sell-off due to broader diversification and less concentration in stocks. Moderately aggressive portfolios also achieved stronger gains during the rebound than more conservative portfolios, due to larger allocations in top performers such as gold and other precious metals, emerging market bonds and high-yield bonds.

    Because some asset classes are more volatile than others, determining how much volatility you can withstand in your portfolio is essential for helping you stay focused on your longer-term goals during the inevitable periods of turbulence.

    Looking ahead to Q3

    As we move into the third quarter of 2016, financial markets are likely to remain volatile as the economic and market shocks of the "Brexit" vote continue to be evaluated. We believe the potential for a recession in Europe has increased, but that the shock isn't likely to lead to a recession in the U.S. or the rest of the world. While the long-term effects on the global economy will take years to unfold, one near-term result is that the Federal Reserve is now expected to refrain from hiking interest rates throughout the rest of 2016.

    The first half of 2016 was book-ended by periods of short-term volatility. But the rapid rebounds following each of those periods serve as an important reminder to maintain perspective and not let emotions take control when markets inevitably become turbulent from time to time. Having a financial plan and staying focused on your goals are among the keys to longer-term investment success.

    How Schwab Intelligent Portfolios Can Help

    With up to 20 asset classes in any single portfolio and automated rebalancing, tax-loss harvesting and goal tracking, Schwab Intelligent Portfolios is designed to manage your portfolio with discipline in order to keep you on track so you can reach your financial goals.

    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.

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

    Indexes used in Figures 1, 2 and 3 are: gold and other precious metals, S&P GSCI Precious Metals Index; U.S. real estate investment trusts, S&P U.S. REIT Index; high-yield bonds, Barclays High Yield Very Liquid Index; U.S. small-cap stocks, Russell 2000® Index; investment-grade corporate bonds, Barclays U.S. Corporate Investment Grade Index; international bonds, Barclays Global Aggregate ex-USD Index; U.S. large-cap stocks, S&P 500® Index; U.S. Treasury bonds, Barclays U.S. Treasury 3–7 Year Index; emerging market stocks, MSCI Emerging Markets Index; cash, Barclays Short Treasury 1–3 Month Index; international developed market stocks, MSCI EAFE Index.

    (0716-HMZ0)


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