MFEM - SCHE: Robust Emerging Market Fund Offering Decent Yield And Total Returns

Summary

• SCHE’s portfolio is less risky, due to high level of diversification, low expense ratio, lower volatility, and investing in right sectors in the most promising EMs.
• SCHE has been paying low but decent yields. Lower risk and potential growth of equities in emerging markets are expected to sustain the current level of yield.
• SCHE’s portfolio is well diversified over a huge number of stocks and recorded an annual average total return of 11.13 percent between 2016 and 2021.
• SCHE’s investors need to be cautious about geo-political conflicts, potential for economic slowdown, sustained high level of inflation, and interest rate hikes.

~ by Snehasish Chaudhuri, MBA (Finance)

Schwab Emerging Markets Equity ETF (SCHE) is an exchange-traded fund that invests in public equity markets of global emerging regions. It is a good enough ETF with a broad range of assets across multiple emerging markets. SCHE has been consistently paying dividends with a decent yield. The dividend seems sustainable. I tested my "7 Factor Model for Evaluating Emerging Market Funds" on SCHE and found that this fund is a reasonably good fund. Over the years, the fund generated decent total return for its investors. It is trading almost at par with its net asset value of $8.83 billion. The fund has invested in high potential sectors in the promising markets. It is trading at $25 at a low discount of 1.25 percent. A detailed discussion will make it clear how SCHE performed in those seven most critical parameters.

SCHE Invests its large Assets Under Management in a Large Pool of Stocks

Schwab Emerging Markets Equity ETF was launched and is managed by Charles Schwab Investment Management, Inc. SCHE seeks to track the portfolio of the FTSE Emerging Index, and uses representative sampling techniques to create its portfolio. FTSE Emerging Index consists of large-cap and mid-cap companies in emerging economies throughout the globe. The fund deals with a high amount of assets when compared to other emerging market equity funds, such as Deutsche X-trackers MSCI Emerging Markets Hedged Equity ETF ( DBEM ), First Trust Emerging Markets AlphaDEX ETF ( FEM ), First Trust RiverFront Dynamic Emerging Markets ETF ( RFEM ), PIMCO RAFI Dynamic Multi-Factor Emerging Markets Equity ETF ( MFEM ), Lattice Strategies Trust - Hartford Multifactor Emerging Markets ETF ( ROAM ), etc.

Schwab Emerging Markets Equity ETF invests in a huge pool of over 1800 individual stocks. Two-third of its investments are made in three most promising economies - China, India and Taiwan. However, the fund invests a very small proportion of its assets in a particular stock. 16 percent of its AUM is invested in four technology stocks - Taiwan Semiconductor Manufacturing Company Limited ( TSM ), Tencent Holdings Limited ( TCEHY ), Alibaba Group Holding Limited ( BABA ), and Meituan ( MPNGF ). Next 20 investments of its portfolio attract only 14 percent of SCHE's net assets. The portfolio turnover is also quite low at 13 percent, implying that the same trend of investing in small proportions in those three emerging markets is expected to continue.

SCHE's Portfolio Investment Strategy Has Both Opportunities and Challenges

Schwab Emerging Markets Equity ETF also invests in ADRs, GDRs and EDRs representing securities of the same index. Due to such a high asset base and low turnover, the expense ratio of this ETF is very low at 0.11 percent. Almost 60 percent of SCHE's portfolio is invested in four sectors - information and communication technology, financial, healthcare, and industrial. These sectors are expected to have the highest growth potential in the coming decade. SCHE was formed on January 14, 2010, and has been paying semiannual dividends since then. The fund generates an annual yield between 2.2 to 3.4 percent. Average yield during 2022 was a little over 3 percent. Annual average total return generated during 2016 and 2021 was a little over 11 percent.

The Chinese economy has been severely impacted by stringent covid restrictions, and will therefore be expected to witness gains since the economy is in the path of recovery. Re-opening of the Chinese economy will be highly beneficial for equity markets. As the economies of United States and European nations are stagnating, SCHE seems to be strategically well-placed to enjoy the benefits of economic growth in some of the most promising emerging markets. However, geo-political conflicts between Taiwan and China, and between China and India may cause a hiccup in the future performance of this fund. The US dollar is on the rise, oil prices have still not stabilised, and the inflation is still quite high. All these factors will also have adverse impacts on the returns of Schwab Emerging Markets Equity ETF.

SCHE Scores Well in '7 Factor Model for Evaluating Emerging Market Funds'

I find Schwab Emerging Markets Equity ETF to be a reasonably good fund according to my "7 Factor Model for Evaluating Emerging Market Funds." It qualifies for the minimum requirements with respect to AUM, and stock price. The fund is also trading at a minor discount to its NAV. The portfolio is well diversified over a large number of stocks. SCHE has been paying semi-annual dividends with a low but decent yield. In my opinion, SCHE's portfolio is comparatively less risky, due to its high level of diversification, low expense ratio, lower volatility, and investing in the right sectors in the most promising emerging economies. Relatively lower risk and potential growth of equities in those three emerging markets are expected to sustain the current level of yield.

Still, its recent price performance can be considered a major drawdown. Schwab Emerging Markets Equity ETF failed to generate positive total return for its investors during the last year. If we keep aside the performance of 2022, SCHE generated high returns between 2016 and 2021 and recorded an average total return of 11.13 percent. I am thus hopeful about SCHE's investors generating strong returns in the long run. However, Geo-political conflicts between Taiwan and China, and also between China and India may result in an unwanted volatility in the future performance of this emerging market fund. Potential for economic slowdown, sustained high level of inflation, and interest rate hikes will most likely prevent investors from getting too bullish on SCHE.

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