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Schwab Brings a Game Changer to the Market, Part III

by Richard


Now that Schwab has dipped their toe in the water….take a look at the next four proprietary ETFs (Exchange Traded Funds) that will be rolled out in December, bringing their total exposure to eight funds:

SCHG:  Schwab U.S. Large-Cap Growth ETF

This index represents half (375) of the 750 stocks that make up the Dow Jones U.S. Large Cap Total Stock Market Index.  Think of this growth oriented index as the flip side of value investing.  This will be the faster growing companies, with the higher price earnings ratio, selling often for several multiples of book value.

If you seek exposure limited to large cap growth stocks…this will be your pick.

SCHV:  Schwab U.S. Large-Cap Value ETF

This is the yin to the yang of the previously mentioned fund.  The other half of the Dow Jones U.S. Large  Cap Total Stock Market Index.  Value investors in the stock market are the equivalent of those consumers who clip coupons and buy in bulk at the warehouse stores.  Price and value are paramount concerns.

These will be the stocks typically that sell at or even below book value, that have fallen out of favor with investors or encountered business setbacks.

Long-term studies of the market going back to 1926 tend to tilt to Value as the more successful investment strategy, just as the results also trend more favorably for small cap vs. large cap stocks.

SCHC:  Schwab International Small-Cap Equity

This fund will track the FTSE Developed Small Cap ex U.S. Liquid Index, consisting of some 1,800  international small cap stocks spread among some 20 plus developed international markets.

This one caught my attention immediately.  During the market meltdown of 2007-2009, the large cap foreign and domestic stocks tanked in virtual tandem, not offering the supposed diversification from non-correlating assets…proving that one multinational is much like another, whatever its domicile may be.

For true international diversification, the small cap sector offers distinct advantages, since there is little or no overlap with their domestic counterparts.

SCHE:  Schwab Emerging Markets Equity ETF

The final fund will track the 740 stock FTSE All Emerging Index, derived from both large and mid cap companies in over 20 emerging markets.  Just as with the international small cap fund, exposure to emerging markets as an asset class provides more pure diversification than investing in large company international developed markets.

Of course, one should expect more volatility in this arena as well.  The ride will be bumpier and the swings much wider than with their developed markets counterparts.

Taken as a whole, these eight funds allow an equity oriented investor to diversify by market cap asset class, as well as geographically.  I also wouldn’t be surprised to see additional offerings in the commodity and real estate sectors going forward, as inflation concerns are addressed.

There is so much fat in mutual fund expense ratios, that this movement to a commission free, rock bottom expense fund family is long overdue.

Schwab is to be commended for stepping up to the plate and delivering the goods.

Cutting expenses worked like a charm for Vanguard.  It could do the same for Schwab.

6 Responses to Schwab Brings a Game Changer to the Market, Part III

  1. Scott S

    Congrats to Schwab for getting in the game. I’ll have to consider these as an alternative to my vanguard accounts as part of a diversification strategy. Since we’ve seen selected financial companies melt down, seems wise to invest in multiple mutual fund companies - Schwab and Vanguard for now. Competition is a good thing. Diversification is an even better thing.

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    The investment seeks to track the performance of a benchmark index that measures the investment return of the overall stock market. The fund employs an indexing investment approach designed to track the performance of the CRSP US Total Market Index, which represents approximately 100% of the investable U.S. stock market and includes large-, mid-, small-, and micro-cap stocks regularly traded on the New York Stock Exchange and Nasdaq. It invests by sampling the index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full index in terms of key characteristics.

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