Variable Annuities
11/04/2010 0 comments
Annuities can be complex instruments with a range of fees and conditions that make them hard to understand and need to be studied carefully. For those who already have some form of annuity, getting the best out of them can be hard because trackign the funds in the Sub-Accounts is not easy. Schwab Select Annuity's plan consists of 58 funds. These funds enable participants to gain exposure to 5 major assets: US Equity, Foreign Equity, REITs, Emerging Market Equity, Fixed Income.
Nevertheless, it is possible to build an effective portfolio that can compete with an ETF portfolio if done right.
Charles Schwab's Income Choice Variable Annuity is a flexible premium deferred annuity contract (“Contract”) which allows you to accumulate assets on a tax-deferred basis for retirement or other long-term purposes.
| Asset Class | Schwab Select Annuity |
| U.S. Equity Excluding Company Stock | 43 |
| International Equity | 4 |
| Emerging Markets | 2 |
| Real Estate Trusts | 1 |
| Fixed Income Including Money Market | 6 |
| Sector Funds | 2 |
The funds are heavily weighted towards US equities but backed up with strong choices in fixed income and funds available in three other classes. It would be slightly improved with more choices in emerging markets and real estate trusts.
| Plan Rating Attribute | Schwab Select Annuity |
| Diversification | 90% |
| Fund Quality | 70% |
| Portfolio Building | 96% |
| Overall Rating | 86% |
US Equity: SPY or VTI Performance table (as of Nov 2, 2010)
This is a very good rating and the portfolio should perform well.
The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA, both provided by MyPlanIQ). For comparison purpose, we also include the moderate model portfolios of a typical 5 asset SIB (Simpler Is Better) plan. This SIB plan has the following candidate index funds and their ETFs equivalent:
Foreign Equity: EFA or VEU
REITs: IYR or VNQ or ICF
Emerging Market Equity: EEM or VWO
Fixed Income: AGG or BND
Performance chart (as of Nov 2, 2010)
| Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| Schwab Select Annuity Tactical Asset Allocation Moderate | 22% | 162% | 10% | 82% | 15% | 122% |
| Schwab Select Annuity Optimized Asset Allocation Moderate | 9% | 118% | 6% | 63% | 13% | 107% |
| Schwab Select Annuity Strategic Asset Allocation Moderate | 17% | 169% | 3% | 18% | 7% | 45% |
| Five Core Asset Index ETF Funds Tactical Asset Allocation Moderate | 16% | 108% | 7% | 47% | 15% | 103% |
| Five Core Asset Index ETF Funds Strategic Asset Allocation Moderate | 19% | 146% | 3% | 12% | 9% | 40% |
Not surprisingly, the Schwab funds beat the five core SIB -- with broad diversification, high quality funds and the ability to put together a solid portfolio, the annuity has strong returns potential.
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