2023-11-15 21:43:44 ET
Summary
- Schwab U.S. Large-Cap Growth ETF has consistently outperformed the S&P 500 and broader indexes since its inception in 2009.
- Recent big-cap tech earnings have been solid, and the decline in core inflation after the drop in oil prices is important.
- The ETF has minimal exposure to sectors that tend to outperform during inflationary periods, but it should outperform if inflation rates continue to moderate.
The market has been very fluid over the last several years. While recent international turmoil has made the investing environment even more tenuous, business cycles have also been more volatile since Covid hit in late 2019 as well.
An investing strategy that has gained favor over the last several decades is targeting ETFs or exchange-traded funds. These investments are easy to allocate capital to, and the fees associated with these funds are usually minimal. One well-known exchange-traded fund that has consistently outperformed the S&P 500 ( SPY ) and most of the broader indexes since the ETF's inception in late 2009 is the Schwab U.S. Large-Cap Growth ETF ( SCHG ).
This ETF has offered investors a total return of 283.5% over the last 10 years, while the S&P 500 has risen 192% during the same time frame.
I last rated the Schwab Large-cap Growth ETF fund a sell when I wrote about this exchange-traded fund in July of this year. Today, I am upgrading this fund to a hold. This ETF is better positioned today with the recent inflation data coming down significantly with oil prices having fallen considerably in the last month now that the peak summer demand months for gasoline are over. Big-cap tech earnings have held up well even during the recent economic slowdown, and the dollar has also begun to fall against the Euro and most major currencies as well.
This ETF has a .04% expense rate, $20.66 billion in assets under management, and a yield of .45%. Nearly fifty percent of this Schwab fund is invested in large-cap tech companies, which is the primary reason this ETF did so well prior to 2020. The two biggest holdings of this fund are Apple ( AAPL ) and Microsoft ( MSFT ), and those two investments alone comprise 26% of the fund's overall investments. The fund also has only 3.2% of the ETF's overall assets in the energy and basic material sectors, which is the primary reason this exchange-traded fund has struggled since the middle of 2020 after inflation rates began to accelerate in early 2021. This ETF is also underweight more conservative sectors such as consumer defensive companies and utilities, so this fund should underperform if the economy were to enter into an extended slowdown.
A chart of the Schwab US Large-Cap Growth ETF's Holdings (seekingalpha.com/symbol/SCHG/holdings)
Recent big-cap tech earnings were solid, and the significant decline in core inflation after the large drop in the price of oil over the last month is also important. Brent Crude Oil prices peaked near $100 a barrel in late September, but oil prices have fallen significantly over the last six weeks primarily because of falling demand.
Recent inflation data unsurprisingly showed that core CPI rose by just .2%, which is the lowest increase seen since September 2021. Food inflation was 3.3%, which was the lowest level seen since June 2021. The drop in the price of energy is particularly impressive given the recent international turmoil, and the slowing increase of price levels should give the Fed and central banks around the world more flexibility. The dollar has also begun to fall against the Euro and most major currencies since inflation rates have come down, and while predicting forex moves is always difficult, this trend is likely to continue with energy prices under pressure.
A chart of the US dollar (marketplace.org/2023/10/06/why-are-oil-prices-suddenly-dropping/)
The dollar has also fallen since late September, following the decline in energy prices and the drop in the rate of inflation as well. Nearly 60% of large-cap tech earnings come from outside of the US, so even minimal forex moves can significantly impact this sector's earnings. Big-cap tech earnings have also held up well. Alphabet ( GOOG ), Microsoft ( MSFT ), Amazon ( AMZN ), and Meta Platforms Inc. ( META ), all beat earnings and revenue expectations. The advertising and software markets have held up well and show no signs of being likely to slow down significantly in the near term.
The fund's largest exposure is also to sectors and companies that look reasonably valued, and this Schwab fund should also be able to continue to outperform most of the exchange-traded fund's peers. The seven biggest tech companies, which represent core holdings of this ETF, currently trade at a price-to-earnings growth ratio of just 1.3. This fund has also consistently outperformed peers such as the Invesco Large Cap Growth fund ( PWB ) and the iShares Morningstar Growth ETF ( ILCG ), primarily because of the ETF's significantly overweight position to large-cap tech.
All investments have risks, and if inflation were to rise again, the dollar was to reverse course and continue to rise against the Euro and most major currencies, or if there was a more prolonged recession, this Schwab fund would be more vulnerable than most investments because of the ETF's heavy exposure to the large-cap tech sectors. This fund's significant holdings of Apple and Microsoft also make the ETF more susceptible to issues that either of those core investments might have. Evaluating big cap tech's earnings, forex moves, and looking at overall macroeconomic data will be key in gauging this more aggressive fund's performance moving forward.
This Schwab fund has minimal exposure to sectors that tend to outperform during inflationary periods, such as the energy and basic material sectors. This ETF also has only minimal allocations to more defensive sectors such as consumer defensives and utilities. Still, while more conservative investors will likely find this fund unappealing because of the ETF's minimal diversity and more aggressive profile, this exchange-traded fund should outperform the broader indexes if inflation rates continue to moderate.
For further details see:
SCHG: A Fund For More Aggressive Investors That Should Be Better Positioned Now (Ratings Upgrade)