SCHO: A Good Place For Short Term Money In An Expensive Equities Market

seekingalpha11-26

The Schwab Short-Term U.S. Treasury ETF (SCHO) offers a 4.3% yield, charges just a 0.03% management fee, and has high liquidity, making it ideal for parking some short-term cash.Current equity markets...

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There are signs of speculative assets reaching bubble territory.SCHO provides a safer alternative to equities, reducing portfolio volatility and offering potential capital appreciation if interest rates decline as expected.Key risks include reinvestment, interest rate, opportunity cost, and inflation risks, but these are minimal for investors willing to wait to re-enter equities at lower valuations.   Robert Daly  Introduction The Schwab Short-Term U.S. Treasury ETF (NYSEARCA:SCHO) holds U.S. government short-term bonds maturing within 1-3 years. This ETF currently pays a distribution yield of about 4.3%, and is less sensitive to changes in interest rates over time given its shorter-term maturity profile relative to longer-term maturity ETFs. Furthermore, the ETF charges a very low 0.03% management fee. Finally, the ETF is very liquid, trading millions of shares per day with a tight spread, so non-institutional investors can easily move in and out of this ETF as is necessary. Thus, SCHO is a good candidate to park some short-term cash while waiting for what I believe is an expensive equity market to correct, or at least offer up some better opportunities. Equity Markets Appear Expensive I'm generally not one to make a broad market call, but I think investors should at least pay attention to and be aware of overall market valuation levels. While timing is generally very difficult, I do think savvy investors, particularly ones that choose to hold individual equities, can benefit from having a general awareness of how expensive or cheap certain markets are at any given time. These investors may want to have a little more cash than usual on the sidelines in expensive markets, and be a little more aggressive investing in individual equities in cheaper markets. Currently, I believe we're much closer to the expensive range, rather than the inexpensive range. It's no secret that markets have done well this year, with the S&P500 (SPDR® S&P 500® ETF Trust (SPY) and Nasdaq Invesco QQQ Trust ETF (QQQ) both exceeding 24% gains (total return including dividends) year-to-date. Smallcaps, represented by the iShares Russell 2000 ETF (IWM) below, haven't quite kept up, but have still put up an extremely respectable 20% YTD.    Koyfin Forward P/Es have climbed this year. The SPY fwd P/E has moved from 20.3 to 22.9, which puts it in territory rarely ever seen in the last two decades. Only during 2020 did valuations reach these levels, and that was when earnings were depressed due to the COVID-19 pandemic. This time around, earnings are reaching record highs.    Koyfin  Koyfin IWM and QQQ trade at even higher valuations. This is perhaps not surprising given tech companies and small caps tend to have greater growth prospects. Nonetheless, these also remain near all-time high valuations. Signs of A Speculative Bubble Are Present In Some Assets Looking further into equities and even more speculative assets like crypto reveal signs that we may be entering extreme levels of speculation. Bitcoin has climbed over 100% this year and is now approaching the big $100k level. Bitcoin has put up such returns before, so this is not particularly surprising, but it is also worth noting that Bitcoin has had extreme drawdowns on the other side of moves like this. Of course, no one can predict how high it might go before pulling back. Even more speculative cryptocurrencies like Dogecoin have increased at even more alarming rates. Bitcoin-related assets, such as MicroStrategy Incorporated (MSTR), which holds substantial amounts of leveraged bitcoin, have put up returns in excess of 500% this year. MSTR continues to trade at a substantial premium to the value of its bitcoin holdings. The company will tell you that's because they use leverage, but that leverage would also likely destroy the company in an extreme drawdown. Other companies like Palantir (PLTR) are up nearly 300% YTD. PLTR now trades at a market cap of around 50 times sales and an enterprise value exceeding 100 times operating earnings. Palantir has inflected to profitability and demonstrated an ability to generate some operating leverage (meaning earnings will likely continue to grow faster than revenue going forward) but that doesn't mean it's worth any price. The last time it got near these multiples in 2021, the stock then went through a 90% drawdown.    Koyfin I'm not saying stocks like FANG+ can't continue to do well. They certainly could. However, I believe it is fair to say that there are pockets in equities right now that appear to be highly speculative at best, and perhaps even outright bubble territory. Diving Deeper Into SCHO As An Alternative To Equities Right Now Given the extreme currently found in some equities, one might be wise to look for alternatives. There are areas in equities that I still do like, and certain stocks as well. But for a larger short term allocation, the safest thing to do is likely to park some money in short-term US treasuries. SCHO provides the ability to do that for individual investors. SCHO currently yields about 4.3%, putting it right about at where US 3-Year treasuries are and slightly below the 1-year and 2-year yields.   Koyfin. An ETF holding US Treasuries should have a very low fee, and SCHO fits that bill. SCHO's management fee of just 0.03% means investors won't see their returns eaten away by fees. This is also lower than competing ETFs like the Vanguard Short-Term Treasury Index Fund ETF Shares (VGSH) and the iShares 1-3 Year Treasury Bond ETF (SHY), which charge 0.18% and 0.15% respectively. Furthermore, SCHO has a higher yield than both of these. SCHO is very liquid and even has options available for more adventurous investors. Investors familiar with options may even be able to sell calls against their position to generate even more yield. An ETF like SCHO will reduce portfolio volatility relative to a portfolio full of stocks. Federal Reserve Chairman Jerome Powell has been quite clear lately that rates are expected to decline going forward. This will have the effect of reducing SCHO's yield, but potentially increasing capital appreciation. Key Risks   Reinvestment risk - There may be some reinvestment risk with SCHO. If future yields decline, investors won't be able to reinvest their cash flow at the same yield. However, if your goal is to park short-term money and get back into equities at lower valuations, then this isn't as much of a concern.  Interest rate risk - If rates going forward suddenly increase instead of the expected decrease, then SCHO's yield will increase, but the price will decrease. This means investors may experience capital losses if the move is drastic.   Opportunity cost risk - If equities continue to do well, then investors may find they would have done better holding stocks rather than shorter-term bonds. Also, because of SCHO's relatively short-term maturity profile, the ETF will have low duration. Thus, if interest rates decrease, investors would likely do better in longer term bonds as longer term bonds are more sensitive to changes in interest rates.  Inflation Risk - Inflation picking up again could result in investors having a yield on SCHO that is lower than the rate of inflation, resulting in a decline of purchasing power.  Ultimately, I believe these risks are minimal for investors aiming to get back into equities at lower valuations. However, if this is a permanent position in your portfolio, you should consider investigating these risks further. Conclusion  Stocks currently appear to be quite expensive to me, and certain areas of markets are showing signs that speculative assets are being bid to unreasonable levels. There is no telling how long this might last, but savvy investors may want to consider alternatives to equities. SCHO is a good ETF to look into for a shorter term position while one waits for more attractive opportunities in equities again.","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":"analysis","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/2486057697"}