Schwab Emerging Markets Equity ETF

SCHE

Market cap $11.4B

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.

Schwab Emerging Markets Equity ETF aims to track the performance of the FTSE Emerging Index and offers exposure to over 20 emerging market countries. Top holdings of SCHE include Taiwan Semiconductor Manufacturing Company, Tencent Holdings, Alibaba Group Holding, Reliance Industries, and HDFC Bank. The Fund provides a well-diversified sector composition and regional exposure, mitigating concentration risks and offering exposure to various industries and emerging market countries.

By Jeff Weniger, CFA, Head of Equity Strategy Key Takeaways South Korea's classification as an “emerging” or “developed” market affects funds' allocations, with some emerging markets funds having no exposure to the country. The “Korea Discount” refers to the low valuations placed on South Korea's stocks relative to stocks in other countries.

Supported by the ongoing U.S.-led global economic growth, the macroeconomic outlook for emerging markets seems to be improving since late 2023. Encouraging indicators favoring the growth potential of EMs can result in investors shifting their focus away from the latter.