Ildo Frazao
By Alex Rosen.
Summary
The Schwab Emerging Markets Equity ETF (NYSEARCA:SCHE) follows The Financial Times Stock Exchange 100 Index (FTSE) in tracking Large- and Mid-cap companies in predominantly emerging markets. Nothing about the fund will make investors stand up and get excited. If you are looking to dip your toes into emerging markets, even if just to say your portfolio is diversified, then maybe consider other emerging market funds that focus on specific sectors. Overall we rate it a Sell, as it is too generalist for our liking.
Strategy
SCHE’s strategy is to track as closely as possible before fees and expenses the FTSE. That’s it. The fund holds over 1800 individual stocks. The main sectors are finance, tech and e-trade. The main countries are Hong Kong, India and Taiwan and the top ten holdings account for 20% of the total fund.
Proprietary ETF Grades
- Offense/Defense: Offense
- Segment: Non-U.S. Equity
- Sub-Segment: Emerging Markets
- Correlation (vs. S&P 500): High
- Expected Volatility (vs. S&P 500): High
Holding Analysis
SCHE holds over 1800 unique mid- and high-cap emerging market stocks. The holdings are distributed fairly equally, with no one holding accounting for more than 5% of the total assets. The fund is weighted towards China and India, with those two countries accounting for approximately 60% of the fund. Sectors are also pretty evenly distributed, with finance, tech and e-tail coming in top three.
Strengths
SCHE’s strength is in its banality. Nothing stands out and says “hey look at me”, “I’m trying this”, or “follow this strategy because it’s unique”. No, SCHE is a very plain ETF that will not wow anyone, but will also not send investors running for the hills. The likelihood of this ETF being a house of cards is negligible. Anybody can follow the strategy and replicate it themselves with very little effort. What you see is what you get.
Weaknesses
The very thing that is SCHE’s strength can also be its weakness. Rufus Miles once said “Where you stand depends on where you sit.” If you are bullish on emerging markets, especially South and East Asia, with no particular sector preference, this might be interesting, but if you want something with a little pizazz, then SCHE has very little to offer.
Opportunities
Emerging Markets, the next big thing. The future is the BRICS (Brazil, Russia, India, China and South Africa). The U.S. and Europe are stagnating. We must look to broaden our horizons and expand to new markets. How long have analysts been saying this. It still holds true. Is SCHE strategically placed to capture that market when it finally takes off? Maybe. Investing in emerging markets is not the worst idea, but make sure the markets are really emerging, and not just labeling themselves that to sneak into portfolios.
Threats
SCHE is heavily loaded in Hong Kong and Taiwan. Hong Kong is not an emerging market, nor is it really even a country. Recent events in China have clearly demonstrated that president Ji Jinping will no longer tolerate Hong Kong’s liberal attitude toward free speech and activism. Additionally, every day a new story comes out about how China is planning to recapture Taiwan. Are these true? No one really knows, but it is certainly something to keep an eye on for the future.
Proprietary Technical Ratings
- Short-Term Rating (next 3 months): Sell
- Long-Term Rating (next 12 months): Sell
Conclusions
ETF Quality Opinion
SCHE is a good enough ETF with a broad range of assets across multiple emerging markets. However the heavy dependence on Taiwan and Hong Kong makes it a bit worrisome, as they both are subject to the whims of China.
ETF Investment Opinion
We rate SCHE a sell. The fund is too broad for our liking and any upside movement will likely be watered down by its diversity. 1800 stocks in one fund can become unwieldy. If you are serious about getting involved in emerging markets, maybe pick a sector first. If you just want to be able to say you invest in emerging markets, then maybe for the bragging rights alone this has some value. Otherwise look for something a little less spread out.
Be the first to comment