Charles Schwab jumped into the exchange-traded fund market about five years ago. How do their offerings match up against some of the more established ETF shops? Should you consider buying Schwab ETFs?
Before analyzing and comparing ETFs, keep in mind that most of them track an index. What makes Schwab products different, however, is that many of them either track different indices than those tracked by similar bigger-name ETFs, or they have significantly different compositions. What investors want to know is: Does that matter? Has Schwab found a neat trick to boost returns, or is it all mostly the same (or worse)?
But are Schwab ETFs more than just generic offerings? Do they offer anything of value that might distinguish them from other funds? With this in mind, let’s take a look at 5 Schwab ETFs and compare them to the expenses and portfolios of ETFs in each respective category.
Schwab Large-Cap ETF (SCHX)
With a name like Schwab Large-Cap ETF (SCHX), you might guess that it tracks the S&P 500 Index. While this fund does have a high correlation to the S&P 500, it has 750 holdings, including midcap stocks, which gives this fund a slightly more aggressive edge to it than the typical large-cap ETF.
The fund has a mere 5-year history (which includes only a bull market), so its performance in a bear market is difficult to gauge. However, in the most recent poor year for stocks, which was 2011, the Schwab Large-Cap ETF returned 1.5%, whereas the S&P 500 gained 2.1%. In every other calendar year since 2010, and year-to-date 2014, SCHX has edged out the S&P 500. Similarly, it has also outperformed the SPDR S&P 500 (SPY) during those years (but not in 2011).
The fund’s rock bottom expense ratio of only 0.04% is another highlight for Schwab Large-Cap ETF, making it a good, low-cost holding for investors wanting a bit of a performance edge over the S&P 500. Just be prepared for more downside during bear markets.
Schwab Mid-Cap ETF (SCHM)
At just 0.07%, Schwab Mid-Cap ETF (SCHM) has the lowest expense ratio among mid-cap ETFs. The fund also offers a slightly different portfolio than those that track the S&P MidCap 400 index. Instead, SCHM holds the 500 largest stocks by market cap after the top 500. This gives the portfolio a tilt toward large-cap stocks, compared to the typical mid-cap ETF, such as SPDR MidCap 400 (MDY).
The Schwab Mid-Cap ETF can be a good core holding for investors who want a more aggressive alternative to an S&P 500 Index fund. Keep in mind that there will be overlap with the Schwab Large-Cap ETF, which holds the top 750 stocks by market cap. This means there can be up to 250 holdings the two funds have in common.
Schwab Small-Cap ETF (SCHA)
Similar to other Schwab domestic stock offerings, Schwab Small-Cap ETF (SCHA) tracks a Dow Jones index; in this case, the Dow Jones US Small-cap Index, as opposed to the Russell 2000, which is commonly used by the more widely-traded fund shops like iShares and Vanguard. Therefore SCHA covers roughly 1750 stocks, by market cap, below the first 750, which is what the Schwab Large-Cap ETF covers.
Therefore Schwab’s Large-Cap ETF and this Small-Cap ETF together cover most of the US stock market without any overlap, which makes for a diverse combination in a portfolio.
Also in keeping with Schwab’s discount pricing, SCHA boasts an impressively low expense ratio at 0.08%.
Schwab International Equity ETF (SCHF)
Continuing with Schwab’s competitive ETF pricing, Schwab International Equity ETF (SCHF) has a rock-bottom expense ratio of 0.08%, placing it among the lowest-cost international ETFs you can find in the investment universe.
The fund tracks the FTSE Developed ex US Index, which covers large- and mid-cap companies in 24 developed markets outside the U.S. However, it does not hold all of the stocks in the index, which gives the fund a bit of an enhanced or actively-managed style. Whether or not this is an advantage remains to be seen.
For example, a similar competitor is Powershares FTSE RAFI Developed Mkts ex-US (PXF). Compared to Schwab’s International Equity fund, PXF has a higher concentration in defensive stocks, which has given it an edge over SCHG in the past year. The Schwab fund has only been around for five years; therefore the jury is still out on its long-term prospects.
Schwab US Aggregate Bond ETF (SCHZ)
To round out our Schwab ETF review, let’s take a look at a bond fund, Schwab US Aggregate Bond ETF (SCHZ). This ETF tracks the Barclay’s Aggregate Bond Index and has an expense ratio of 0.06%.
This compares to iShares Core US Aggregate Bond (AGG), which tracks the same index and has an expense ratio of 0.08%.
The Schwab ETF just turned 3 years old; so we can make a performance comparison with 1-year, 3-year and year-to-date returns:
- Schwab US Aggregate Bond Index: 4.12% for 1-year return, 3.19% for 3-year, and 4.12% year-to-date.
- iShares Core US Aggregate Bond: 3.95% for 1-year return, 3.24% for 3-year, and 3.98% year-to-date.
One might expect, all other things being equal, the fund with the lower expense ratio will win the performance race, especially for long-term returns. However, this is not the case here. The Schwab fund wins in the shorter periods of 1 year and year-to-date but loses to the iShares fund in the 3-year race.
Taken as a whole, the Schwab ETF lineup competes well with low expense ratios and provides value to investors by offering portfolios that have holdings with slight deviations from the generic ETF that precisely tracks an index. Therefore, if you want to buy the actual index, you may want to look elsewhere for your ETFs.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.