SCHG ETF: It’s Time To Get Fearful (NYSEARCA:SCHG)

The Market is Providing An Opportunity

The Schwab U.S. Large-Cap Growth ETF (NYSEARCA:SCHG) is one of the larger and better-performing growth-focused ETFs. The market has entered a phase of extreme greed, and investors should use this opportunity to make tactical changes to their portfolios.

Sentiment & Correlation with S&P 500

The CNN Fear & Greed Index has entered extreme greed. A review of the index to S&P 500 performance shows the Fear & Greed Index is a good indicator of tops and bottoms. A look at the correlation between the S&P 500 and the CNN Fear and Greed Index shows a strong correlation, and over the last 2 years, the Fear and Greed Index has capped at ~70 with only a few instances of it breaking the 75 barrier, the extreme greed threshold.

SCHG – A Very concentrated ETF

SCHG is very concentrated. It holds 252 securities, but the top 10 holdings make up 54% of the portfolio weight and almost half of the portfolio is focused on technology.

Microsoft & Apple Outlook

Apple (AAPL) and Microsoft (MSFT) combined make up 25% of this ETF; so I will provide a more in-depth look at their expected performance over the next year, given their outsized influence.

Apple – Still an iPhone maker with a software side gig

Product sales which are made of hardware products like the iPhone, Macs, iPads, etc. have been flat over the last 3 years at approximately $300 billion. Services have increased 25% over 3 years from $68 billion to $85 billion. Services increased from 18.7% to 22.2% as a percentage of revenue

Also of note is a decline in Apple’s share buybacks compared to prior years. Share buybacks decreased by 11% from the prior 2-year average of $87 billion to $77 billion.

Now, in terms of valuation, Apple is near its 10-year high P/S ratio of ~8.5. It sits at 8.1. It is likely Apple will remain flat or move mildly lower over 2024, unless the Apple Vision headset is a hit.

Microsoft – AI is priced in

I wrote an article earlier that I believe is still relevant. The main point for MSFT is that the AI growth potential is already priced in. The article I wrote uses the adoption of the internet as a model for how AI can affect MSFT’s bottom line. In my prior article, I explained why sales is a better indicator of value and stock performance and as the chart below shows, MSFT is near its P/S ceiling.

Like Apple, Microsoft will most likely be range-bound in 2024 with current prices of ~$375 representing the upper ceiling.

The other top holdings

Nvidia (NVDA) – is one of the few top holdings I am bullish about because NVDA will be one of the primary beneficiaries of the AI boom. Remember, during a gold rush, you want to be selling pickaxes instead of hunting for gold. Nvidia is set to become the largest pickaxe dealer around. A look at its P/S Ratio also shows it is off the euphoric highs from earlier this year when the P/S Ratio exceeds 40. It is at 27.35, which is in line with previous pandemic-era highs. If competitors like AMD (AMD) fail to provide a meaningful alternative, Nvidia will likely see a new normal in what constitutes a normal P/S range.

Despite this bullishness, there are better funds to gain exposure to Nvidia, and the AI boom I detail further below.

Alternative Funds

Regarding SCHG, QQQ has consistently beaten SCHG over most periods of time. Since most ETF investors are not market timers, you will likely benefit most by using the current environment as an opportunity to sell out of SCHG, wait for a pullback, and buy into QQQ.

For exposure to Nvidia, I like SMH and SOXX in that order. SMH has 18% of its holdings in NVDA and the rest spread out to other chip makers, including Taiwan Semiconductor (TSM), in the top 10. SOXX is another semiconductor ETF, but it does not have TSM in its top 10 holdings, which I value because they fabricate chips for many chip companies.

Conclusion

The market is nearing its highs of the year, and the prospect of lower rates is making most investors excited. Now is the time for prudent investors to get nervous and consider making tactical changes in this environment that will set you up for success in the next year and onward. Two of these specific changes are swapping SCHG for QQQ and looking at more focused funds for direct exposure to trends that are likely to be lucrative over the remainder of the decade.