ETF Cloning of the Schwab VA

11/30/2010 Share 0 comments

In a previous article noted that Variable Annuities have well chosen sub account funds that can lead to a portfolio that can deliver good returns. We now examine the Schwab Select Annuity, compare it with the Fidelity Personal Retirement Annuity and see how well an ETF clone performs

In Summary, the Fidelity Personal Retirement Annuity's plan consists of 56 funds. These funds enable participants to gain exposure to 5 major assets: US Equity, Foreign Equity, REITs, Emerging Market Equity and Fixed Income.

We are now going to build a clone plan and see how it performs. We will simplify the choice and not duplicate styles.

US Funds

The US funds choice is very wide and here we will not mirror all the choices just one in each style category.

International Funds

Similarly we will match one style in each category in the international asset class.

Emerging markets

We select two emerging market ETF's to provide an alternative style.

Real Estate

Real estate is under represented -- an international REIT would strengthen this asset class. We will add an international REIT Fund to the ETF's.

Fixed Income

The fixed income class is well balanced with good choices and diversification. We match this with the exception of having a second intermediate term bond.

We are not attempting to match any of the balanced funds as there is no opportunity to use these in a standalone portfolio. While the managed funds are available, the fee structure is such that the returns are going to leak into other people's pockets and it will pay you to be on top of your own investments -- either directly or through a professional.

We now compare the returns of the two plans using tactical and asset allocation strategies with a moderate risk portfolio.

Performance chart (as of Nov 19, 2010)

Performance table (as of Nov 19, 2010)

The Variable Annuity Portfolios have a clear lead over its ETF clone. The reason for this is the larger number of funds to allow styles rotation.

In fact, to get similar performance using ETF's, you would need to go to one of the richest plans -- provided by TD Ameritrade. The comparison is below.

Performance chart (as of Nov 19, 2010)

Performance table (as of Nov 19, 2010)

One important note is that the returns are before fees are assessed. Variable annuities are complex instruments with fees that can be in excess of 2% of the asset base per year. Even so, the historical returns are good and there is the benefit that gains are not taxed.

Looking at the fund design for Variable Annuities can be instructive to allow you to build a plan that enables portfolios that give you good risk adjusted returns.

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