SCHY - SCHY: Buy The Dip On This Low-Cost Diversified High-Income Equity Fund

2023-09-25 23:57:38 ET

Summary

• The US Dollar Index has been on a strong run, causing foreign stocks to underperform relative to US equities.
• The Schwab International Dividend Equity ETF has performed well despite the dollar's advance, with a 3.7% trailing 12-month yield.
• SCHY is a cost-effective option for investors seeking tax efficiency and offers a diversified portfolio of high dividend-yielding stocks.
• I outline key price levels to consider as we approach a favorable point on the calendar.

The US Dollar Index (DXY) is on one heck of a run. It’s nearly working on a perfect Q3 - being up each of the past 11 weeks (including this current final week of September). Generally, when the greenback runs up, foreign stocks crawl backward, at least on a relative basis to US equities.

Indeed, since the dollar’s advance began on July 18, the Schwab International Dividend Equity ETF (SCHY) has underperformed the S&P 500 ETF (SPY), but relative losses have been modest.

I have a buy rating on SCHY. The low-cost and diversified portfolio has performed well amid macro headwinds while its above-average 3.7% trailing 12-month yield should attract value and income investors.

US Dollar: Working on 11 Straight Positive Weeks

SCHY: Hanging In There Amid A Surging DXY

According to the issuer , SCHY aims to track as closely as possible, before fees and expenses, the total return of an index composed of high dividend-yielding stocks issued by companies outside the US. The ETF is a cost-effective option for investors seeking tax efficiency. It can serve as a core or complementary part of a diversified portfolio of selected high-yield stocks with a decade-long dividend history, financial strength, and modest volatility.

SCHY features a low 0.14% annual expense ratio and has more than $700 million in assets under management. The aforementioned yield earns the fund just a C+ rating, however. I looked further into it, and that mediocre grade is due to the fact that SCHY has had just 1 year of dividend growth. When you consider that the June payout of $0.29 was higher than the previous two June distributions, the weak rating may be a bit deceiving.

Broadening out, the ETF has strong momentum, though recent price action over the past several months has been lackluster. Still, with the very low expense ratio and modest risk profile , investors seeking added income compared to the ex-US developed market index should consider an overweight position in SCHY. Finally, with average daily volume of more than 100,000 shares and a 30-day median bid/ask spread of a mere four basis points, the fund earns a solid B liquidity rating .

The 133-holding portfolio, as of September 25, 2023, has a somewhat high 40% annual turnover rate. The 30-month-old fund is also classified as a large-cap value ETF. Morningstar’s Style Box illustrates that half the allocation is in the top-left quadrant with just 9% exposed to mid-caps and 1% in the growth category. Schwab lists the price-to-earnings ratio at a quite cheap 11.27 as of June 30, 2023, while its return on equity is robust 23.57%.

SCHY: Portfolio & Factor Profiles

What I find particularly appealing is how diversified SCHY is. Take a look at the sector breakdown - no single area is more than 16% of the portfolio while the top 10 holdings account for under 40% of the fund.

SCHY: A Diversified Allocation

Seasonally, non-US developed markets, as measured by the iShares MSCI EAFE ETF (EFA), tend to waver into early October, according to data from Equity Clock , but that often marks a timely period to go long. So, with a degree of patience, investors can get in at a good spot on the calendar.

Ex-US Equities Tend To Perform Well From Mid-October To Year-End

The Technical Take

On a total return basis, SCHY nearly notched a new all-time closing high back in August. As equity markets around the world have pulled back, however, SCHY has encountered a rough patch. Notice in the price-only chart below that shares broke under an uptrend support line that began late last year. Also, the long-term 200-day moving average had been solidly upwardly sloped, but it is now turning more flat, indicating the bears are starting to regain control after a steep bullish run off the October 2022 bottom.

I see risk that the fund could test the low $20s (just $1 lower from here) given the breakdown under the 200dma. Further making the case for that assertion is a high amount of volume by price that is seen down to the low $20s. I think there’s a bit more to go in this correction that began with bearish RSI divergence at the August zenith but buying on the dip into the low to mid $22s looks like a solid risk/reward play.

Overall, SCHY has outperformed EFA by about six percentage points over the past two years, and though that relative strength has waned somewhat lately, I see a favorable technical setup emerging.

SCHY: Correction Mode, Eyeing Low $22s Support

The Bottom Line

SCHY is a solid option for dividend investors seeking broad ex-US exposure with minimal emerging market exposure. I would be a buyer on dips over the coming weeks.

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