SCHO ETF: Best-In-Class Features And Active Return Prospects

seekingalpha08-13

The Schwab Short-Term U.S. Treasury ETF is in focus amid rising speculation about the short end of the yield curve.We think lower economic persistence will readjust the yield curve's level and slope, ...

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However, SCHO ETF's existing distribution base is high due to elevated U.S. interest rates.A peer comparison suggests that SCHO ETF has best-in-class metrics.We think SCHO ETF is an active opportunity for the remainder of 2024 and early-2025.   Douglas Rissing The Schwab Short-Term U.S. Treasury ETF  is in focus today as we turn our attention to the short end of the yield curve.  It will probably be a busy week in the bond market as U.S. CPI inflation data is due on Wednesday. As such, an opportunity to assess treasury securities has emerged. Moreover, plenty of debate about short-term implied interest rates has occurred due to an \"interest rate pivot\" narrative and the general shape of the yield curve. Giv","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"VGSH":"美国短期国债ETF-Vanguard","BK4588":"碎股","BK4550":"红杉资本持仓","SPTS":"SPDR Portfolio Short Term Treasury ETF","SHY":"债券指数ETF-iShares Barclays 1-3年国债","SCHO":"嘉信短期美国国债ETF","FDN":"First Trust Dow Jones Internet I","BK4585":"ETF&股票定投概念"},"translate_title":"SCHO ETF：一流的功能和积极的回报前景","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"VGSH":1,"FDN":1,"SCHO":1,"SHY":1,"SPTS":1,"US30Y.BOND":0.9,"US7Y.BOND":0.9,"US6M.BOND":0.9,"US5Y.BOND":0.9,"US3Y.BOND":0.9,"US2Y.BOND":0.9,"US12M.BOND":0.9,"US10Y.BOND":0.9,"US912797GK78.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6,"US912797HE00.BOND":0.6},"content_text":"The Schwab Short-Term U.S. Treasury ETF is in focus amid rising speculation about the short end of the yield curve.We think lower economic persistence will readjust the yield curve's level and slope, leading to pricing tailwinds for SCHO ETF.Reinvestment risk might eventually occur. However, SCHO ETF's existing distribution base is high due to elevated U.S. interest rates.A peer comparison suggests that SCHO ETF has best-in-class metrics.We think SCHO ETF is an active opportunity for the remainder of 2024 and early-2025.   Douglas Rissing The Schwab Short-Term U.S. Treasury ETF (NYSEARCA:SCHO) is in focus today as we turn our attention to the short end of the yield curve.  It will probably be a busy week in the bond market as U.S. CPI inflation data is due on Wednesday. As such, an opportunity to assess treasury securities has emerged. Moreover, plenty of debate about short-term implied interest rates has occurred due to an \"interest rate pivot\" narrative and the general shape of the yield curve. Given the current market environment, here are our latest thoughts on the Schwab Short-Term U.S. Treasury ETF. What is SCHO ETF? The Schwab Short-Term U.S. Treasury ETF uses representative sampling to track the Bloomberg US Treasury 1-3 Year Index, providing investors with exposure to a short-term yield bucket. As shown below, the ETF's exposure aligns with its descriptions, providing investors with access to a 1—to 3-year bucket. However, I want to highlight that SCHO's exposure isn't static. Acquisitions of new issuances and dispositions of existing constituents might alter its portfolio's makeup.   Maturity Portfolio Exposure   < 1 Years 0.12%   1 - 3 Years 97.9%   3 - 5 Years 1.98%   Click to enlarge Source: Schwab (Month Ending June) The vehicle's return distribution shows that it yields most of its returns from an income component. However, as mentioned in the introduction and as shown by the yield curve (discussed later), the interest rate environment is volatile, meaning price activity is likely. Data by YCharts A final mention for this section is the SCHO ETF's dividend distribution frequency. The vehicle pays monthly distributions, providing investors with more frequent cash flows than standard treasury securities. Seeking Alpha Duration A bond portfolio's effective duration measures its price change for a parallel shift in interest rates. Most bond portfolios (including SCHO ETF) have positive duration, meaning their price returns are negatively correlated to interest rates. Moreover, bond portfolios have convexity, which accounts for non-linearity in bond price changes (the rate of change in bond prices isn't a linear phenomenon). I factored the aforementioned into play and collated an interest rate scenario. However, note that the scenario is based on the yield curve and not actual interest rates. Why did I use the yield curve? Because the bond market is forward-looking and, therefore, mostly uses market implied rates to assign asset value. Here are my workings.   Yield Curve Scenario Price Change   -25 basis points +0.475%   -50 basis points +0.95%   -75 basis points +1.425%   -100 basis points +1.9%         +25 basis points -0.475%   +50 basis points -0.95%   +75 basis points -1.425%   +100 basis points -1.9%   Click to enlarge Source: Author's Calculations (Data from iShares) Aside: I used SCHO ETF's current effective duration of 1.9. Note that the vehicle's duration may change in time. Moreover, I excluded SCHO ETF's convexity from the formula, as short-term treasury convexity is negligible (shown by its close peer SHY ETF's convexity of 0.05). What's Our Duration Outlook? Our general opinion about the duration of the SCHO ETF is simple: The yield curve, paired with real economic factors, suggests that plenty of activity is en route for the SCHO ETF. U.S. Yield Curve (worldgovernmentbonds.com) The yield curve has inverted once more and the short-end is exceptionally high. For example, the one-year settled at about 4.473% on August 12th. Although Wednesday's CPI figures might throw this analysis off guard, we think a decline in the short end of the curve will emerge. Our baseline is that the U.S.'s year-over-year inflation is trending down, suggesting that the economic cycle's persistence factor is losing steam. The argument is supported by factors like increasing unemployment rates, waning business and consumer confidence levels, allowing annualized GDP growth rate, and lower retail sales. I want to be clear. We don't think economic tail risk will occur. Instead, we believe a general cooldown is happening, which will likely intensify the \"interest rate pivot\" narrative and, subsequently, introduce movement in the yield curve. U.S. Salient Economic Data (Trading Economics) Although other scenarios are possible, we think the curve will level down in late 2024 and, ultimately, slope upward, leading to bullish steepening. If realized, such an event would likely lead to a sharp uptick in the market price of the SCHO ETF (for its standards) driven by an abrupt drop in the shorter end of the curve. Reinvestment Risk Unfortunately, SCHO ETF has reinvestment risk as it has to invest in and dispose of constituents on a recurring basis (to maintain its set maturity range). As previously discussed, we could see short-term interest rates recede in late 2024 and throughout 2025. This will likely drag SCHO ETF's income-based component downward in time. However, the excessive level of U.S. interest rates has set the ETF's current dividend base very high. To illustrate my point, the SCHO ETF has a 30-day SEC yield of 4.36% and a trailing dividend yield of 4.19%. I have embedded the ETF's dividend and price history below to juxtapose its price- and income-based attributes. Seeking Alpha Peer-Based Metrics Peer-based data was collated to set a relative comparison. We used iShares 1-3 Year Treasury Bond ETF (SHY), Vanguard Short-Term Treasury ETF (VGSH), and SPDR Portfolio Short Term Treasury ETF (SPTS) as my peers. However, this is merely our selection; other peers exist. Peers (Seeking Alpha) A noteworthy factor is SCHO's splendid expense ratio, which ranks below VGSH and SHY. Let's contextualize the difference: Assuming constant expense ratios, SCHO has a 3.11% advantage over SHY for a 10-year horizon. Although SCHO has a lower expense ratio, its average daily volume is significantly lower than its peers. This could lead to liquidity risk in a correlated market environment and/or deviations from the vehicle's net asset value. In fact, SCHO currently possesses a 98 basis point discount/NAV, but this shouldn't necessarily be seen as an arbitrage opportunity; It may simply be an illiquidity issue. Seeking Alpha Lastly, I want to outline SCHO ETF's divided. While its three-year dividend CAGR might be lower than those of its peers, its trailing dividend yield and four-year average dividend yield are best-in-class. Sure, systematic risk will likely dictate SCHO's distribution. Nevertheless, relative advantages can add a buffer. Seeking Alpha Quantitative Risk Metrics An assessment of SCHO ETF's key risk metrics conveys a few telling points. The table below lists a few key points; a discussion follows.   Metric Value   Monthly Value-at-Risk (5%) 0.51%   Monthly Conditional Value-at-Risk 0.92%   Upside Capture Ratio 2.42%   Downside Capture Ratio -2.49%   Skewness 0.27   Click to enlarge Source: Portfolio Visualizer As shown by its Value-at-Risk ratio, the SCHO ETF has lost about 0.51% of its value in 5% of its traded months, which we don't consider to be much. However, we are surprised by the ETF's conditional VaR of 0.92%. The CVaR metric, otherwise known as expected shortfall, communicates an asset's tail risk beyond its VaR (by averaging its outliers). Although a higher CVaR (than VaR) is normal, SCHO ETF's CVaR is 1.8x higher than its VaR, suggesting its tail risk is telling. Furthermore, SCHO has positive skewness, indicating that most of its outliers are on the right side of the bell curve. Nevertheless, the ETF maintains a capture ratio of less than 1 (upside capture/downside capture), which, once more, reiterates that investors might underestimate its tail risk. The Bottom Line Defining a good fixed-income investment opportunity depends on numerous factors, such as an investor's horizon, tax status, and whether the instrument is used to fund liabilities, to name a few. However, our assessment of the Schwab Short-Term U.S. Treasury ETF shows that a broad range of investor types can benefit.  In our view, a drop in the short end of the yield curve is likely due to lower economic persistence and slower inflation growth. We believe a drop in the short end will enhance the SCHO ETF's pricing outlook, enabling investors to benefit from price gains. Furthermore, a peer analysis shows that the SCHO ETF has best-in-class expense and dividend metrics, providing its investors with idiosyncratic benefits. Although reinvestment risk might enter the fray, we are net bullish about the SCHO ETF's prospects.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"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":"4.29.3","shortVersion":"4.29.3","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/2459572902"}