The Schwab U.S. Large-Cap ETF (SCHX) is among the top passively managed exchange-traded funds I think investors may be overlooking right now. Unlike other index funds which track broader market baskets and hold stocks according to their market cap weightings, the SCHX ETF is set up differently. This particular exchange traded fund is designed to provide broad exposure to the large-cap blend segment of the U.S. equity market. Launched late-2009, this ETF currently holds more than $39 billion in assets, so it’s a big player in the world of large-cap investing.
The ETF itself holds around 750 of the largest publicly-traded stocks in the U.S. market. These range from the usual suspects, from Magnificent 7 tech companies to other biotech and financials firms. But with a rock-bottom management expense ratio (MER) of just 0.03% and solid performance demonstrated in recent years, this has also proven to be one of the best ETFs for long-term investors to hold onto.
Now, large-cap stocks tend to outperform smaller-cap names from a risk-adjusted basis. But given the rotation of capital into many high-growth tech stocks (which also happen to be among the largest names in the market), this fund has outperformed many others tracking broader market trends. Let’s dive into whether that can continue, and the bull case behind why this fund may still be a buy right now.
Key Points About This Article:
- The Schwab U.S. Large-Cap ETF (SCHX) exchange traded fund tracks 750 of the largest publicly-traded stocks in the U.S.
- This fund has outperformed other major ETFs in recent years, but the question is whether this outperformance can continue.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.
SCHX Holdings
Like most ETFs out there, the Schwab U.S. Large-Cap ETF provides some of the cheapest and broadest diversification to investors I’ve come across. This fund offers a rock-bottom management expense ratio of just 0.03%, which rivals some of the cheapest MERs I’ve come across. Finding diversification at the lowest cost possible is important to long-term investors, and this fund certainly does just that.
As I mentioned earlier, the SCHX ETF is weighted heavily toward the largest-cap companies in the world, with Apple, Microsoft and Nvidia representing significant holdings for this fund. In fact, the top 10 holdings of the SCHX ETF make up nearly one-third of the weighting of this overall fund, speaking to just how top-heavy the market is, even among large-cap stocks.
That said, for those looking to gain exposure to the Magnificent 7 and other related names with the growth rates and stability to position a portfolio for continued outperformance, this is the way to go. That’s not saying there aren’t risks with holding such a fund, but it’s recognition that such a strategy has indeed outperformed in recent years.
Risks
Speaking of risks. As with any investment opportunity, it’s important to look at the risks before jumping into any stock (or basket of stocks). While the SCHX ETF is certainly well-diversified, and investors aren’t giving up much in terms of fees for this diversification, it’s also true that market-related risks are something that generally can’t be avoided. If we do see a recession materialize, SCHX will get hit as will the overall market. And there are certain investors out there who may believe that this particular group of stocks may be hit harder, given how high valuations are in the large-cap segment of the market relative to small-caps.
This divergence in valuation multiples is a factor that’s certainly worth paying attention to. Large-cap stocks tend to be valued at lower multiples than smaller companies which have higher growth. That makes sense. But a select group of mega-cap tech stocks have seen their multiple soar to levels that resemble micro cap companies. If any sort of growth headwinds materialize, that could certainly bode poorly for this ETF overall.
I think owning SCHX or similar funds really comes down to one’s perception of how the overall economy will perform in the years to come, and how the structure of the market will look in a few years’ time. For those who think the biggest stocks will continue to get bigger, this is an ETF to own. Those who think a rotation is more likely may want to look elsewhere.
What Makes SCHX a Buy
I’ve been a proponent of the idea that we will certainly see a rotation of capital away from large-cap stocks toward smaller-cap names, particularly if interest rate cuts materialize as investors had previously expected and the broader economy gets a boost from looser monetary policy.
However, I’m also aware that many investors in the market are likely to retain a growth tilt for many years to come. Technology stocks and other companies with higher growth rates can be found at the upper echelons of the market capitalization rankings. That hasn’t historically been the case, but that’s the way the market is constructed, at least for now. Until we see a marked shift in how regulators view these companies and pursue breakups of the household giants most portfolios rely on for growth, SCHX will likely remain a top fund investors continue to flock to.
I’m not saying that this ETF’s one-year return of approximately 35.92% is replicable for the years to come. But I am saying that it’s entirely possible that the fund’s three-year annualized return of 10.90% could continue, should the soft landing so many economists are calling for materializes.
We’ll see. But one thing’s for certain – betting against large-cap stocks has been the wrong move in recent years. Those looking to overweight their portfolio to this group may want to take a look at this particular ETF.
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