SCHF ETF: Navigating Diversification Waters In 2024

The Schwab International Equity ETF (NYSEARCA:SCHF) is one of the leading ETFs that focuses on equities outside the United States, tracking the FTSE Developed ex US Index and covering mainly large-cap companies.

In this article, I analyze the ETF’s most important metrics, risks, composition, and other relevant characteristics, combining my market view for 2024 to obtain an appropriate valuation.

In particular, my thesis is that SCHF is an excellent ETF that can be combined with other investments in the portfolio and diversify, which will be necessary in 2024, a year that could be unstable and present several unknowns on the horizon.

Composition of the ETF

First of all, SCHF focuses mainly on Large Cap and Mega Cap companies, with 78.71% of its assets (considering companies with market capitalization above $15 billion), which I believe is very important, especially in uncertain economic times. An excellent characteristic, from my point of view, is also the almost total absence of Small Caps (in this case, companies below $1 billion) with 0.05% of the portfolio. In the case of SCHF, I believe that the small-cap component can introduce too much volatility.

From a diversification point of view, SCHF is excellent, both in terms of geographical and sectoral diversification, with a preference for sectors that are historically less volatile and offer greater dividends.

Another important feature concerns the diversification of individual companies, with a total number of holdings of 1544 (updated as of 01/30/2024) and with the maximum exposure per holding being lower than 2%.

Other Important Ratios: Is the ETF Really That Good?

Let’s start with the fact that SCHF is extremely efficient and attractive for investors: it has a Net Expense Ratio of only 0.06%, making it extremely economical compared to other peers. It boasts an excellent Weighted Average Market Capitalization of around $84 billion and outstanding trading volumes. Furthermore, in the last 10 years, it has replicated its reference index practically perfectly, if not actually gaining.

From my perspective, an ETF with these characteristics, regardless of the investment focus, sends an excellent signal to investors.

Comparing SCHF with the category average provides even more important information, underlining that the ETF is indeed exceptional. In fact, the alpha in all time frames is above the category average, as is the Sharpe ratio.

The same can be noted regarding performance.

So “Is the ETF really as good as it seems?” Yes, it is! In the category, based on the metrics, it probably represents the best alternative at the moment.

The four main risks of 2024

Although the ETF’s metrics indicate that SCHF is one of the best in the category, it should not be forgotten that performance in the coming months will be influenced above all by macroeconomic and geopolitical factors. In particular, I believe there are currently four major risks for this year: overly optimistic expectations on interest rate cuts, excessive valuations in stock markets not supported by macroeconomic data, geopolitical tensions and risks of military escalation in certain areas, and presidential elections in 40 different countries.

Below is a short excerpt from my reflection on the possible risks for the market in 2024, as contained in another article of mine:

While interest rate cuts are generally positive for investors, the risk lies in excessive optimism leading to an overvaluation of assets, similar to the current scenario.

Geopolitical tensions, such as issues in the Red Sea and the blockage of routes in the area, pose a risk of a new surge in prices and consequently a delay in rate cuts. This would consequently result in a drop of risky assets’ price.

Another source of uncertainty revolves around the presidential elections in 40 different countries in 2024. Risky assets typically do not favor unpredictability, and certain outcomes considered “unfavorable” by the market could trigger sell-offs.

(Source: Navigating Through 2024 Markets: Rating Upgrade For DTH)

Therefore, I believe it is important to be cautious in 2024 and generally increase diversification in portfolios. In fact, looking at the performance of SCHF in the long term, despite offering poorer performance compared to other investments (or indexes in this case), a good way to mitigate risk could be to combine SCHF to reduce exposure to more volatile markets or those too exposed to certain sectors.

Final Considerations

In conclusion, the ETF presents excellent metrics from a fundamental point of view, making it an excellent choice, especially to diversify overexposure to certain sectors or geographical areas in preparation for an uncertain 2024.

What also makes SCHF interesting is its dividend yield of 2.96% and its valuation multiples, which are lower than other markets or indices (PE ratio of x13.40).

However, taking the ETF as a single investment is not recommended from my point of view. In fact, SCHF should always serve as diversification and not as a speculative bet or as the only asset in the portfolio, due to the market risks I mentioned above.

For these reasons, I give SCHF a “Hold” rating.