2023-09-04 09:00:00 ET
Summary
- Investing in mutual funds and ETFs allows individuals to benefit from growth areas without the need to actively manage individual equities.
- The Schwab U.S. Large-Cap Growth ETF is a low-cost ETF that provides a diversified approach to investing in tech-heavy companies.
- SCHG has outperformed the market, with a proven track record of generating double-digit returns and may continue to outpace traditional index funds in a multi-year bull cycle.
Some investors prefer investing in mutual funds and ETFs rather than taking on exposure from individual equities. I know several people who don't want to allocate the time to read through quarterly reports or keep up with the latest news but still want to invest in growth areas that have the potential to outpace the market. Investing in high-quality mutual funds and ETFs is a hands-off approach where individuals can enjoy their lives and spend time doing what they enjoy. For many investors, investing in index funds will be the easiest way to benefit from being in the market with the least stress. For those who are looking for a tech-heavy ETF that has the potential to outpace traditional index funds as part of an overall portfolio, the Schwab U.S. Large-Cap Growth ETF ( SCHG ) is a straightforward low-cost ETF that provides a diversified approach to achieve this goal. I believe the market is setting up for a multi-year bull cycle and that SCHG is a diversified approach to benefit from the companies that could lead the markets to all-time highs.
A look under the hood of SCHG
SCHG is an ETF from The Charles Schwab Corporation ( SCHW ) that focuses on tracking the total return from the Dow Jones U.S. Large-Cap Growth Total Stock Market Index. The Dow Jones U.S. Large-Cap Growth Total Stock Market Index includes companies ranked 1-750 by total market capitalization and that are classified as growth. The index looks at projected earnings growth based on an expected 3-5 year annual increase in operating EPS, trailing revenue growth based on annualized revenue growth over 5 years, and trailing earnings growth based on annualized EPS growth for the previous 21 quarters. The index is a float-adjusted market cap-weighted index.
SCHG's policy is that under normal conditions, it will invest at least 90% of its net assets in the stocks that create the Dow Jones U.S. Large-Cap Growth Total Stock Market Index. The other 10% of net assets may be allocated to positions not included in the Large-Cap Growth Index. At the end of Q2 2023, SCHG had an expense ratio of 0.04%, held 243 securities within its portfolio, paid its distribution on a quarterly basis, and had an overall rating of 5 stars from Morningstar. SCHG has just over $19.8 billion in total net assets as of 9/1/23, with a net asset value ((NAV)) of $76.88 per share. SCHW is a tech-heavy ETF that has allocated 45.62% of its assets in that direction. Within its top-ten holdings, you will find Apple ( AAPL ), Microsoft ( MSFT ), NVIDIA ( NVDA ), Amazon ( AMZN ), Alphabet ( GOOGL ), Tesla ( TSLA ), and Meta Platforms ( META ).
SCHG went IPO on 12/11/09 and, since its inception, has had an average annualized return of 15.31%. SCHG isn't a gimmick ETF, as it's investing in the largest growth companies in the U.S. SCHG has a proven track record of providing an inexpensive way for investors to obtain a hands-off approach to the quickest-growing large caps and generating a double-digit return. For a short period in 2021, there was a stigma that if you weren't generating high double-digit or even triple-digit returns that you were doing something wrong, but in the long run, those periods fizzle out, and beating the market isn't as easy as reading some headlines and allocating capital.
Investing in SCHG vs. The Market
When I compare any individual stocks or funds to the market, I use the SPDR S&P 500 Trust ( SPY ) as my market indicator. SPY tracks the S&P 500, which is comprised of the 500 largest companies throughout the U.S. Prior to conducting this comparison, I want to be clear on several things. I am very bullish on S&P 500 index funds, and I have 100% of my 401K invested in an S&P 500 index fund. Outside of work-sponsored retirement accounts, I am invested in S&P 500 index funds and total market funds in other accounts. I am not writing this article to discredit S&P 500 index funds or total market funds. I am writing this to show that there are other types of index funds that have performed better and can be a positive addition to a diversified portfolio of investments.
Steven Fiorillo, Seeking Alpha
Just in the top 10 holdings, there is a big difference between SCHG and SPY. While the companies are almost identical, SCHG has a much larger focus on technology. SPY has 30.71% of its assets allocated toward its top-10 holdings, while SCHG has 55.17% of its assets allocated to its top-10 holdings. Having a larger focus on the largest companies geared toward growth has helped SCHG outperform the market over an extended period.
Since the beginning of 2010, an investment of $10,000 in SPY has generated a 412.21% return. Over the past 13.66 years, the annualized return has been 12.7%. These are great statistics as the return is over the market's historical average, and the end value on a $10,000 investment is $51,219.72. Over the same period, the same $10,000 investment allocated toward SCHG would have generated an additional $14,095.67, as the end value as of 9/1/23 would have been $65,915.39. In the last 13.66 years, SCHG has returned 559.52% for an annualized average of 14.8%, which is 2.1% larger than the annualized average return for SPY. Past performance does not indicate what will occur in the future, but going back over 13 years is a long enough track record to establish a scenario of what could happen if tech continues to push the market higher.
Why I think a multi-year bull cycle is coming, and SCHG will outpace SPY
I believe that while the next several months could be choppy for the markets due to an upcoming CPI report on 9/13, the Fed interest rate decision, and economic projections coming on 9/20, ultimately setting up a multi-year bull market. If I am correct, I foresee Tech leading the markets higher, and if this occurs, SCHG should continue to outpace SPY due to its focus on large-cap growth companies and its larger allocation into big tech.
Since 1973, we have only seen the market decline for at least 2 consecutive years twice, and after each down year, the market has rebounded with at least 2 positive years. The talks of a looming recession continue to be pushed out, but what if we already experienced the recession in 2020? Many individuals continue to cling to conventional wisdom regarding an inverted yield curve as the driving force for an upcoming recession. I am not indicating that a recession won't occur in the future as it is inevitable, but I do believe that it's going to take significantly longer to experience the next recession than some believe.
Excluding the current period, going back to 1960, a recession was only avoided once in 1966 after the yield curve became inverted. We see an inverted yield curve when long-term interest rates fall under short-term rates. This is an indication that the long-term outlook is weak, and the yields generated by long-term fixed-income assets will continue to deteriorate. This has become a leading indicator of recessions because a recession occurred after rates got close to becoming inverted in 1960, then after they inverted in 1969, 1973, 1980, 1981, 1989, 2000, 2007, and 2019.
We are currently in a period where the Treasury term spread between the 10-year and 3-month rates is -1.49%, and this is the steepest inversion since 1981. The probability of a recession over the next 12 months continues to push higher as it reaches 70.85% in May of 2024 and has declined to 66.01% for July of 2024. Probability is on the side of history from these indicators, except for the anomaly in 1966.
The major difference between the previous periods of recession and today is the unemployment rates. In each of the recessions from 1970 to 2020, the unemployment rate exceeded 5%. Looking at the chart above and the chart below, when rates inverted in 1966, but a recession didn't occur within the next 12 months, unemployment was under 5%. I think we're in a period that more resembles 1966 rather than any of the other periods where a recession occurred right after a yield curve inversion.
It's much harder to go into a recession when unemployment is low and people are spending money. While the U.S. debt balance has increased since 2014, individuals can service the debt even if they're not paying off their balances. Unemployment is the key economic indicator that we should be focusing on and not an inverted yield curve because as long as individuals are able to service their debt through employment, we should continue to see GDP expansion rather than a retraction into a recession.
I went through the analyst's estimates for GOOGL, AAPL, META, MSFT, NVDA, TSLA, and AMZN out through 2025 for EPS. At the end of 2023, these companies are projected to generate $49.88 in combined EPS, and that is expected to increase 51.22% ($25.55) to $75.43 in 2025. For these companies to grow their EPS this dramatically over a 2-year period, a recession is unlikely as it would mean a contraction in GDP had occurred for at least 2 quarters. These companies are expected to grow their EPS YoY in 2024 and again in 2025. On an individualized level, the range in EPS growth from 2023 - 2025 is 19.14% for APPL to 98.15% for AMZN. This level of EPS growth will be difficult to achieve with less spending and a decline in GDP. My prediction is that if these companies come close to meeting analyst's expectations, then the markets will move higher, and given the allocations in big tech between SCHG and SPY, SCHG should continue to outperform SPY on an annualized basis.
Conclusion
Investing in individual equities isn't for everyone, and picking stocks that appreciate isn't easy. It's even harder to make investments that continuously outperform the market. This is why, for many investors, investing in index or total market funds is a more rewarding approach toward investing. SCHG allocates its net assets toward the largest growth companies in the U.S. which has a large focus on technology. I don't believe we're headed into a recession, and a multi-year bull market is approaching as the largest companies in the market are expected to increase their EPS YoY in 2024 and 2025. If this occurs, I feel that tech will lead the markets higher, and SCHG is a great way to benefit from a tech-led rally. If you're interested in a diversified growth fund that has a track record of generating larger returns than a standard S&P 500 index fund, then SCHG is worth looking into as part of a diversified investment portfolio.
For further details see:
SCHG Is An Inexpensive Approach To Benefit From Tech In The Next Bull Cycle