SCHE ETF: Not A Buy, But Not The Worst Option Around Either

seekingalpha2024-08-23

SCHE is a 14-year-old ETF offering exposure to over 2000 stocks from 20 emerging markets, generating 17% returns in the past year.When compared to VWO the largest EM-themed ETF, SCHE doesn't have any ...

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VWO distributes its dividends every quarter , and it gives investors the option to reinvest those dividends more frequently in other high-yielding terrains. 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Over the past year, SCHE has fared reasonably well, generating returns of over 17%, but it still hasn’t been good enough to overhaul the 25% returns witnessed by global markets.   YCharts Could the situation reverse going forward, and is SCHE the most ideal way to play EM equities? SCHE Doesn’t Have Any Major Flaws, But Why Not Just Go With VWO? If you’re exploring a list of recommended EM ETFs, you’d be hard-pressed to find one without the presence of the Vanguard FTSE Emerging Markets ETF (VWO). For the uninitiated, VWO is the largest EM focused ETF around with a total AUM of $107bn, which makes it dwarf SCHE’s corresponding AUM by almost 12x. When we measure SCHE against this behemoth we don’t see too many pressing drawbacks, but the latter just appears to be a little more efficient, more stable, more liquid, and perhaps even a slightly better income profile. Both products track different indices; SCHE follows the FTSE Emerging Index, whereas VWO follows the FTSE Emerging Markets China A Inclusion Index which covers only large and mid-cap Chinese stocks and avoids small-caps. VWO covers a much wider pool of EM stocks (close to 5000) than SCHE (around 2000), but as you’ll see shortly, that hasn’t really translated to a marked differential in either the return profile or the volatility profile of these two products. The image below highlights how VWO has outperformed SCHE, but the difference is only a little over 200bps.   YCharts Prima facie, one would think that some of the excess return comes from VWO taking slightly more risk but, even here, the differential in the rolling volatility of these two products is not very stark at just around 7bps!   YCharts Even from an income angle, there’s not a lot to split these two products, with both products currently offering near-identical yields of over 3%, but investors may want to note the difference in frequencies and the recent generosity with which VWO has been growing its dividends. VWO distributes its dividends every quarter (as opposed to a semi-annual calendar for SCHE), and it gives investors the option to reinvest those dividends more frequently in other high-yielding terrains. Also note that the pace with which SCHE’s dividends have grown in recent years is only around mid-single digits, whereas VWO has been growing it a figure closer to double-digits. From a cost angle, one can’t be too severe on SCHE as it can still be accessed at a compelling enough expense ratio of 0.11%, but VWO’s figure is lower by 3bps, and over long periods, this could make a difference. Since SCHE covers a smaller pool of stocks, it is also more prone to churn, with a turnover ratio that is 2.6x more than VWO. Then tactical short-term investors who like to get good fills will also be more enthused with dabbling in the VWO counter, as its average bid-ask spread differential is rather miserly at just 0.2%; SCHE’s figure is 2x higher. This is of course a function of the heightened degree of dollar volumes seen in the VWO counter on a daily basis, with a superior differential of 14x!   Seeking Alpha, ETF.com Closing Thoughts As implied in the previous section, SCHE may not be the most compelling way to play EM equities and thus, does not garner a Buy rating, but that doesn’t also mean that this product should be written off Firstly, SCHE’s main regional tilt is towards Chinese equities (28% of the portfolio), and whilst things are far from hunky-dory here, with economic weakness carrying on to July after a weak Q2, there’s reason to believe things may turn for the better. Recent reports suggest authorities there may step up the level of stimulus to kickstart the economy, particularly the consumption side, which has previously not received the degree of support that the infrastructure and export-oriented industries have received. Research from government backed think-tanks are now recommending cash vouchers to the tune of 1 trillion yuan, equating to 0.8% of the GDP. There are also a healthy chunk of financial stocks here (23% of the portfolio, the largest sectoral weight), and whilst lending conditions in China are currently at their lowest point in 15 years, supportive monetary policy could help conditions reverse. In Q3, the reserve requirement ratio is expected to drop by 25bps, followed by another 10bps cut in Q4. Meanwhile, the financial stocks of the other key EM- India remain in a very healthy state with the bad loan ratio expected to drop even further by 50bps next year, and credit costs (0.8%) already at roughly only half the long-term average (1.5%). With the Modi administration carrying on its third term, the associated policy continuation also bodes well for loan growth in India, with credit growth expected at a decent enough pace of 12-14% next year. Another reason to get on board with EMs is the ongoing weakness of the US dollar, which has dropped to its lowest point this year. The job market in the US isn’t proving to be as resilient as initially thought, and this is making the futures market price in even more rate cuts than what was expected a few months back. The expectation is that the Fed could cut rates by 25bps on three or four separate occasions through this year, and this is reflecting poorly on the dollar.   FT Then the EM to DM (Developed market) ratio also looks quite oversold by historical standards and offers decent scope for mean-reversion (currently at record lows and 17% off the mean).   YCharts Investors who know a good deal could likely gravitate to EM stocks as they are poised to deliver superior long-term earnings growth of 200bps, but are yet priced at a valuation discount of 6% vs developed markets.    Morningstar","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":"4.29.4","shortVersion":"4.29.4","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/2461254340"}