SCHX: Attractively Valued, Low-Cost Fund Despite Short-Term Downsides

seekingalpha08-09

PM Images Investment Thesis Schwab U.S. Large-Cap ETF (NYSEARCA:SCHX) deserves a buy rating due to multiple unique strengths despite short-term downward pressures. While international sales, ...

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While international sales, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4712366-schx-attractively-valued-low-cost-fund-despite-short-term-downsides\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>SCHX: Attractively Valued, Low-Cost Fund Despite Short-Term Downsides</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nSCHX: Attractively Valued, Low-Cost Fund Despite Short-Term Downsides\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-09 05:47 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4712366-schx-attractively-valued-low-cost-fund-despite-short-term-downsides><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>PM Images Investment Thesis Schwab U.S. Large-Cap ETF (NYSEARCA:SCHX) deserves a buy rating due to multiple unique strengths despite short-term downward pressures. While international sales, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4712366-schx-attractively-valued-low-cost-fund-despite-short-term-downsides\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"FDN","symbol_name":"First Trust Dow Jones Internet I","start_time":0,"source_url":"https://seekingalpha.com/article/4712366-schx-attractively-valued-low-cost-fund-despite-short-term-downsides","article_id":"2458376970","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1345558469/image_1345558469.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2458376970","pubTimestamp":1723153673,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"PM Images Investment Thesis Schwab U.S. Large-Cap ETF (NYSEARCA:SCHX) deserves a buy rating due to multiple unique strengths despite short-term downward pressures. 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While international sales, especially in China, have declined for top tech holdings, SCHX’s heaviest large-cap companies are taking positive actions to regain competitiveness. Additionally, while reduced interest rates will have a lower boost to large caps, compared to small and mid-caps, SCHX’s top holdings show robust fundamentals. Finally, SCHX’s extremely low expense ratio and comparatively attractive valuation are key advantages for the fund compared to peer large-cap ETFs. SCHX Overview and Compared ETFs SCHX is an ETF that seeks to track the Dow Jones U.S. Large-Cap Total Stock Market Index. With its inception in 2009, the fund has 753 holdings and $41.3B in AUM. The Schwab fund aims to provide access to the 750 largest U.S. companies ranked by market capitalization. Due to its market-cap weighted focus on large cap U.S. stocks, SCHX is heavy on the information technology sector with 31.9% weight. For comparison purposes, other funds examined are iShares S&P 100 ETF (OEF), Vanguard Large-Cap ETF (VV), and SPDR S&P 500 ETF Trust (SPY). OEF is the least diversified fund compared and focuses on mega cap holdings. OEF and VV were selected for comparison due to their selection of large and mega cap holdings while both have a heavier weight on the IT sector at 37% and 38% respectively. SPY was included for comparison as an S&P 500 Index fund. Due to its greater market diversification, SPY has a lighter weight on IT companies, but still holds 30.7% weight in the sector. Fund Comparison: Performance, Expense Ratio, and Dividend Yield Large cap and S&P 500 Index funds have seen strong performance over the past decade. SCHX has seen a 10-year average annual return of 12.6%. By comparison, OEF and VV have both outperformed SCHX with a 10-year average annual return of 13.8% and 13.0% respectively. SPY, which tracks the S&P 500 Index has seen a 10-year average return of 12.7%. 10-Year Total Price Return: SCHX and Peer Large-Cap Funds (Seeking Alpha) Despite its slight underperformance, SCHX has an extremely low expense ratio at just 0.03%. Because each compared fund is heavy on growth-focused IT companies, they have low dividend yields. SCHX offers only a 1.33% dividend yield, which is on the higher end compared to peer funds. Expense Ratio, AUM, and Dividend Yield Comparison     SCHX OEF VV SPY   Expense Ratio 0.03% 0.20% 0.04% 0.09%   AUM $41.29B $12.42B $53.20B $535.81B   Dividend Yield TTM 1.33% 1.11% 1.39% 1.31%   Dividend Growth 5 YR CAGR 4.24% 1.34% 4.52% 4.76%   Click to enlarge Source: Seeking Alpha, 7 Aug 24 SCHX Holdings and Key Outlook Factors SCHX is the most diversified of compared large cap funds with over 700 holdings. The fund therefore has the lowest weight on top 10 holdings with 31.7% weight. Because of the large and mega-cap focus, each funds' top companies are almost identical with the heaviest weights on Apple (AAPL), Microsoft (MSFT), and NVIDIA (NVDA). Top 10 Holdings for SCHX and Compared Large-Cap ETFs   SCHX – 753 holdings OEF – 105 holdings VV – 502 holdings SPY – 503 holdings   AAPL – 6.38% AAPL – 9.84% MSFT – 7.17% AAPL – 6.78%   MSFT – 6.34% MSFT – 9.79% AAPL – 6.62% MSFT – 6.74%   NVDA – 5.48% NVDA – 8.45% NVDA – 6.23% NVDA – 5.82%   AMZN – 3.17% AMZN – 4.89% AMZN – 3.91% AMZN – 3.36%   META – 2.31% META – 3.57% META – 2.39% META – 2.46%   GOOGL – 1.99% GOOGL – 3.06% GOOGL – 2.31% GOOGL – 2.11%   GOOG – 1.68% GOOG – 2.59% GOOG – 1.89% GOOG – 1.78%   BRK.B – 1.63% BRK.B – 2.52% LLY – 1.67% BRK.B – 1.74%   LLY – 1.35% LLY – 2.09% AVGO – 1.61% LLY – 1.44%   AVGO – 1.34% AVGO – 2.07% BRK.B – 1.53% AVGO – 1.42%   Click to enlarge Source: Multiple, compiled by author on 7 Aug 24 SCHX faces two short-term downsides: sluggish international sales and the current interest rate environment. However, SCHX’s top holdings are actively taking measures to overcome weak sales and demonstrate strong fundamentals to weather interest rate fluctuations. These factors are discussed in further detail below. Short-Term Downside #1: International Sales SCHX’s top holdings are reliant on international sales for continued performance. For large caps, 38% of their revenue, on average, comes from outside the United States. By comparison, only 19% of U.S. small-cap revenue comes from international sources. Therefore, a slump in international sales, directly impacts SCHX’s overall performance. AAPL, SCHX’s #1 holding at 6.38% weight, sees about 20% of its revenue from China. Apple has been challenged by lower-than-expected iPhone sales in China, predominantly due to price competition. Experiencing recent economic challenges, Chinese customers are increasingly price sensitive, exchanging brand loyalty for the greatest bargains. Fluctuating Apple Sales in China By Year (Statista, Apple) The primary approach Apple has employed is price reduction. With iPhone discounts as much as $318, Apple is strengthening its price point against Chinese competitors, including Xiaomi and Huawei. This strategy has proven successful in the past. During a discount window this past March, Apple saw iPhone shipments to China increase by 12%. Apple is not the only top SCHX holding overcoming overseas challenges, however. Microsoft receives 49% of its overall revenue from outside the United States, including about 10% from China. For Amazon, about 40% of its sellers are in China. Amazon is also taking action to fight price sensitivity including a discount store for Chinese customers. Specifically, Amazon is aiming to overcome eCommerce competitors, Temu and Shein. Therefore, while SCHX’s top companies faces pressure from Chinese competition, its top U.S. holdings are taking assertive actions to counteract competitors. Short-Term Downside #2: Interest Rates and Comparative Performance The second key short-term downside for SCHX is the interest rate environment. Examining rolling 20-year returns between 1991 and 2019, U.S. mid-cap and U.S. small cap generally outperform large cap stocks, and therefore the funds that contain them. However, we saw a divergence from this long-term trend in starting in 2021. Between 2021 and early 2022, large caps outperformed small caps by nearly 16%, as measured by the Russell 1000 against the Russell 2000. Again in 2023, large caps also outperformed strongly. This outperformance coincides with the increase in interest rates, which has elevated to current levels. Increase in U.S. Treasury Yield and Interest Rates (Morningstar, U.S. Federal Reserve) However, this trend is likely about to change. The latest report in June showed that inflation reached 2.5%, lower than May’s 2.6%. This progress towards taming inflation and reaching the Federal Reserve’s 2% target indicates that interest rates are very likely to see a reduction next month. Further cuts are expected down to potentially 4% by the end of 2025. Such a trend could drive a reversal of the large cap disparity seen since 2021. Therefore, as interest rates decline, investors may pile into the stronger price returns for small and mid-cap funds, making SCHX comparatively less attractive. Reason to Buy #1: Large-Cap Fundamentals Despite these short-term risks to SCHX, there are multiple reasons to be optimistic about the Schwab fund. The first is its extremely low expense ratio already discussed. Another reason is the fundamental qualities of SCHX’s top holdings. Using net income margin, EBITDA growth, and dividend growth as measures of strength, SCHX is on solid footing. SCHX's top five holdings, on average, have an impressive net income margin of 31.5% and YoY EBITDA growth of 174.9%. Fundamental Quality Metrics for SCHX Top Holdings   Holding SCHX Weight, % Net Income Margin, TTM EBITDA Growth, YoY 5-Year Dividend Growth Rate   Apple 6.38% 26.44% 6.31% 5.56%   Microsoft 6.34% 35.96% 26.68% 10.23%   NVIDIA 5.48% 53.40% 709.11% 6.91%   Amazon 3.17% 7.35% 61.87% N/A   Meta 2.31% 34.34% 70.74% N/A   Click to enlarge Source: Seeking Alpha, 7 Aug 24 By comparison, the average net profit margin for the Russell 2000, which captures U.S. small caps, stands at just 7.2%. Additionally, top U.S. large caps have also been increasingly attractive to dividend seekers. Meta issued its first dividend back in February, while Alphabet began paying dividends in April. While SCHX has a slightly lower weight on these mega-cap, big tech companies compared to peer funds, the fund has been able to achieve similar performance at a lower cost. Reasons to Buy #2: Current Valuation  SCHX and peer large-cap funds have all seen strong one-year returns, even when including the recent selloff. While SCHX has seen a 15.3% one-year performance that is slightly lower than the S&P 500 Index, this has still strongly outperformed mid and small-cap funds. Vanguard’s Small Cap ETF (VB), in contrast, has seen a one-year return of just 5.2%. A popular mid-cap ETF provided by Invesco (IJH) has seen a one-year return of 6.8%. One-Year Performance: SCHX, Small-Cap, Mid-Cap, and S&P 500 Funds (Seeking Alpha) Importantly, SCHX has the most attractive valuation of peer funds. SCHX also currently has a lower price-to-earnings and price-to-book ratio than the S&P 500 Index overall, as measured by the SPY fund. Valuation Metrics for SCHX and Peer Large Cap Competitors     SCHX OEF VV SPY   P/E ratio 22.24 23.24 22.50 22.36   P/B ratio 4.09 4.98 4.31 4.21   Click to enlarge Source: Morningstar, 7 Aug 24 Risks to Investors Despite SCHX’s strengths, the fund faces multiple risk factors. The first was seen just this past week with fears of an economic slowdown. While July’s forecast unemployment rate was expected to remain at 4.1%, the actual figure rose to 4.3%. In fall of 2022, 72% of economists polled believed that a U.S. recession was going to happen in 2023. While the U.S. economy has elusively avoided recession, recent worse-than-expected earnings for companies like Intel (INTC) has driven a sharp sell-off. The second key risk factor is political. Both current and previous presidential administrations have pushed tariff hikes estimated to reduce long-run GDP by 0.2%. Due to SCHX's link to international revenues previously discussed, increased tariffs will have a direct impact on the fund. Concluding Summary  SCHX outmatches peer large-cap funds with a low expense ratio and attractive valuation. While SCHX’s top tech holdings face challenges with international sales, these companies are taking corrective measures to regain their competitiveness. Additionally, while small and mid-caps are poised to see greater gains than large caps as interest rates are reduced, SCHX’s top holdings boast strong fundamentals that posture the fund for long-term returns.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.3","shortVersion":"4.28.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2458376970"}