XSMO - SCHA: Factor Analysis Of Schwab's Popular Low-Cost Small-Cap ETF (Rating Upgrade)

2024-05-17 23:09:31 ET

Summary

• SCHA is Schwab's well-diversified small-cap blend ETF, offering investors exposure to 1,750 companies for just 0.04% in annual fees. This expense ratio is second-lowest in the category.
• While limiting fees is important, the approach has not worked well recently for the small-cap ETF segment. One explanation is that the lowest-fee products own too many non-profitable stocks.
• SCHA's profit score ranks a disappointing #31/49. Passive alternatives like VB rank better, as does XSMO, the top-performing momentum-based fund in the category over the last three years.
• Still, my factor analysis reveals SCHA ranks well on growth and sentiment. Furthermore, recent earnings surprises reveal small-cap stocks have impressed the most.
• These statistics warrant a rating upgrade. While I'm confident better alternatives exist, SCHA's prospects have improved, and I've assigned it a "hold" rating.

Investment Thesis

The Schwab U.S. Small-Cap ETF ( SCHA ) ranks well in categories like assets under management, expenses, liquidity, and diversification. However, SCHA's disappointing quality led to my "sell" rating in May 2023. In the year since, SCHA has delivered a total return of 20.02% , lagging behind higher quality peers like the Vanguard Small Cap ETF ( VB ) and more concentrated Invesco S&P SmallCap Momentum ETF ( XSMO ) by 1.86% and 17.38%, respectively. SCHA's one-year returns ranked #25/49 in the small-cap blend category. ...

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