Schwab Emerging Markets Equity ETF

SCHE

Market cap $12B

Schwab Emerging Markets Equity ETF (SCHE) offers a compelling 44% P/E discount to the S&P500, with broad exposure to China and Asia's growth engines. SCHE's top holdings include TSMC, Tencent, and Alibaba, providing access to leading tech and consumer platforms in emerging markets. Despite long-term volatility, SCHE and peers have recently outperformed the S&P500, driven by a falling U.S. dollar and global capital rotation.

IEMG commands a much larger assets under management (AUM) base and offers broader exposure with more holdings than SCHE IEMG delivered higher 1-year and 5-year returns, but with a slightly deeper maximum drawdown over five years Both ETFs show similar sector allocations and top holdings, but IEMG carries a marginally higher expense ratio These 10 Stocks Could Mint the Next Wave of Millionaires ›

Emerging markets equity returns have been driven by extreme mega-cap concentration, with index breadth collapsing to historic lows and masking weakness across much of the opportunity set. This concentration has distorted relative results for active managers, particularly those constrained by diversification rules or broad benchmarks, as small-cap underperformance and index construction limit flexibility.

Schwab Emerging Markets Equity ETF earns a hold rating due to high concentration, lower dividends, and less diversification versus IEMG. SCHE offers a lower expense ratio (0.07%) but hidden costs and sector/geographic concentration offset this advantage compared to IEMG. While SCHE has slightly lower volatility, its heavy exposure to China, Taiwan, and tech increases hidden risks versus IEMG's broader diversification.

Last week FTSE made its annual review of country classification within its global equity indices (see the announcement here). One of the most interesting changes was Vietnam's upgrade from frontier to emerging market.

I view SCHE as a Hold, not a Buy, due to heightened geopolitical and currency risks in emerging markets today. SCHE and VWO are structurally similar, with only minor differences in sector and country weights; neither offers a compelling alpha case now. Diversification benefits from SCHE are limited, as global correlations remain high and US large caps already provide international exposure.

Schwab Emerging Markets Equity ETF benefits from a weaker U.S. dollar and relatively stable commodity prices. Elevated U.S. interest rates remain a headwind, though some emerging economies are more resilient. SCHE is heavily concentrated in Asia, with significant exposure to China and India.

I maintain a "hold" rating on SCHE due to a strong USD, momentum in developed markets, and global trade uncertainties. The USD's strength is a significant headwind for emerging markets, impacting countries in SCHE's portfolio that trade directly with the US. Valuations in emerging markets are not universally cheap, with Asia, a major component of SCHE, not offering clear value compared to other regions.

SCHE is a 14-year-old ETF offering exposure to over 2000 stocks from 20 emerging markets, generating 17% returns in the past year. When compared to VWO the largest EM-themed ETF, SCHE doesn't have any major flaws, but the former still offers an edge with its structural qualities. We close with some thoughts on why SCHE's portfolio of EM equities may not be the worst idea around.

The article evaluates the Schwab Emerging Markets Equity ETF and I downgrade my outlook to "hold" due to headwinds and under-performance compared to the S&P 500.