VYM - SCHV: 2024 Could Mark Value's Return

2023-12-13 13:59:18 ET

Summary

• Value investing focuses on undervalued stocks, while growth investing focuses on high-growth stocks.
• Schwab U.S. Large-Cap Value ETF™ is a compelling choice for investors seeking exposure to the Large Cap Value segment of the U.S. equity market.
• The SCHV ETF has a well-balanced portfolio with top holdings including Berkshire Hathaway, JPMorgan Chase, Exxon Mobil, Johnson & Johnson, and Procter & Gamble.

Value-oriented investing and growth-oriented investing are fundamentally different. Value investing is about identifying stocks that seem to be trading beneath their actual or book value. Value investors hold a staunch belief that the market reacts excessively to both positive and negative news, causing a disconnect between stock price and a company's underlying fundamentals. This overreaction paves the way for value investors to gain by buying stocks when their prices are undervalued.

On the other hand, growth style investing involves investing in companies that exhibit signs of above-average growth, even if the share price seems expensive in terms of metrics such as price-to-earnings or price-to-book ratios. Growth investors are more concerned with the stock's future earnings potential and are willing to pay a premium for it. They believe that the company's high growth rates will lead to higher stock prices over time.

I like value over growth here, largely because I don't believe Technology stocks will continue their outperformance in 2024. The Schwab U.S. Large-Cap Value ETF™ ( SCHV ) is a compelling choice for investors seeking exposure to the Large Cap Value segment of the U.S. equity market.

Launched on December 11, 2009, SCHV is a passively managed exchange-traded fund ("ETF") sponsored by Charles Schwab. The fund, with assets over $10 billion, is one of the larger ETFs focused on mirroring the Large Cap Value segment of the U.S. equity market. The ETF tracks the Dow Jones U.S. Large-Cap Value Total Stock Market Index while striving to match its performance before fees and expenses. A significant feature of SCHV is its low annual operating expenses – only 0.04% – making it one of the most cost-effective products in its category. The ETF has a 12-month trailing dividend yield of 2.69%.

Detailed Analysis of SCHV Holdings

SCHV's portfolio includes 508 U.S. large-cap value stocks. Top positions include:

1. Berkshire Hathaway Inc. Class B (BRK.B): This shares of this multinational conglomerate holding company account for about 3.28% of SCHV's total assets. Known for its steady returns, Berkshire Hathaway is a significant part of the financial sector.

2. JPMorgan Chase & Co. (JPM): This multinational investment bank and financial services holding company represents 2.33% of SCHV's assets. It's a leading entity in the financial services sector.

3. Exxon Mobil Corp (XOM): This American multinational oil and gas corporation holds the second position in the SCHV portfolio with 1.98% of total assets. Exxon Mobil is a cornerstone of the energy sector.
4. Johnson & Johnson (JNJ): This multinational corporation, specializing in pharmaceuticals, medical devices and consumer packaged goods, accounts for 1.87% of the SCHV's assets. It is a pivotal player in the healthcare sector.

5. Procter & Gamble Co. (PG): This American multinational consumer goods corporation contributes 1.72% to the SCHV's portfolio. It plays a significant role in the consumer staples sector.

No tech stocks here. I like it.

Sector Composition and Weightings

The SCHV ensures a well-balanced spread across multiple sectors. The Financials sector commands the highest allocation at about 19% of the portfolio. The Industrials and Healthcare sectors follow, rounding off the top three. This sector distribution allows SCHV to maintain diversification and mitigate company-specific risk.

Peer Comparison

When benchmarked against similar ETFs, SCHV has lagged. For instance, the Vanguard High Dividend Yield ETF ( VYM ) and the Vanguard Value ETF ( VTV ) track a similar index, but both funds have outperformed. Much of this has to do with the top 10 differentials. I'm not overly concerned about that, as it's more of a macro style tilt argument to favor value over growth.

Pros and Cons of Investing in SCHV

Investing in the SCHV offers several advantages. Firstly, it provides broad exposure to the Large Cap Value segment of the U.S. equity market. Secondly, its low expense ratio and dividend yield make it an attractive option for cost-conscious investors. Lastly, the ETF's diversification across various sectors helps mitigate risk.

However, there are a few cons to consider. The large-cap companies that SCHV invests in are generally mature and may not offer the same growth potential as mid- or small-cap companies. Additionally, value investing, which attempts to identify undervalued companies with potential for improved valuations, can become out of favor depending on shifts in market and economic conditions.

Conclusion: To Invest or Not to Invest?

I favor value over growth, which is why I believe Schwab U.S. Large-Cap Value ETF™ is a good fund to consider. Next year could result in some major rotations, and I expect value broadly to relatively lead.

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