Investing has gotten more complicated over the last several years. With Covid, inflation, and now growing signs of an extended economic slowdown, many individuals and institutions have had to significantly adjust capital allocation strategies since 2019.
A well-known and popular type of exchange traded funds to invest in over the last several decades has been large cap funds. One ETF that focuses on these types of investments is the Schwab U.S. Large-Cap Growth ETF (NYSEARCA:SCHG).
This fund is up a very impressive 481.58% over the last 14 years, while the S&P 500 is up 292% during this same timeframe. Still, this ETF has also struggled significantly over the last 2 years. This exchange traded fund has risen just 1.29% since early July of 2021.
The Schwab U.S. Large Cap Growth exchange traded fund is an ETF with $19.18 billon in assets under management. The fund also has an expense ratio of .04% and yields .46%.
Today I rate this ETF a sell. There are increasing signs of an extended economic slowdown, and this fund is heavily leveraged to more cyclical companies and sectors. This ETF also has only minimal holdings in the energy and basic material sectors, this fund has not been well positioned in an inflationary environment, and prices should continue to rise at above average rates. Finally, this ETF is also not well-diversified, nearly half of the fund’s holdings are in large technology companies.
Nearly fifty percent of this Schwab fund is invested in large cap tech companies, which is the primary reason this ETF did so well prior to 2020. The two biggest holdings of this fund are Apple (AAPL) and Microsoft (MSFT), and those two investments alone comprise nearly 26% of the fund’s overall investments. The fund also has only 3.2% of the ETF’s overall assets in the energy and basic material sectors, which is the primary reason this exchange traded fund has struggled since the middle of 2020. Finally, this ETF is also underweight more defensive sectors such as consumer defensive and the utilities, so this fund should underperform if the economy were to enter into an extended slowdown, which looks increasingly likely.
This Schwab fund is an aggressive growth fund that has holdings heavily concentrated in just a few large cap tech stocks, so this ETF is more vulnerable to the business cycle. The Fed’s target for inflation is 2%, and the current rate of prices increases is still well above that level, with prices rising at 4% in May. Powell is not likely to reverse course and begin to lower rates for some time, the economy is likely to continue to struggle. Indicators such as the inverted U.S. yield curve, falling shipping rates, and copper prices being down 20% from this year’s peak are also all signs pointing to a likely continued slowdown.
While there is a scenario where this Schwab fund could outperform, that possibility seems remote right now for several reasons. If inflation levels were to come down more quickly and the Fed were to reverse course, the large cap tech holdings of this fund would benefit significantly in multiple ways, including from what likely would be a weaker dollar, but Powel is showing no signs of wanting to change the current rate cycle. This fund should outperform if the economy were to recover quicker than expected because of the ETF’s significant exposure to more cyclical companies and sectors.
Investing strategies often have to evolve even as financial goals remain the same. With Covid hitting in 2019 and then inflation levels hitting historic highs in 2021 and 2022, the economic environment has become more difficult to navigate. While the Schwab US large cap growth ETF significantly outperformed the S&P 500 and most of the broader indexes for nearly a decade, this exchange traded fund is not well-positioned in the current inflationary environment, and the fund would also likely underperform if there is prolonged economic slowdown, which looks increasingly likely.
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