Introduction
We last analyzed Schwab International Equity ETF (NYSEARCA:SCHF) back in February 2023. At that time, we noted the eventual end to the global inventory correction and that improving global manufacturing PMI would eventually act as catalyst to SCHF’s fund price. SCHF has indeed delivered good performance. However, we are in a much different macroeconomic environment now. It is time for us to review SCHF and provide our update and recommendations.
ETF Overview
Schwab International Equity ETF has a portfolio of large-cap stocks in the developed markets, excluding the U.S. The fund basically tracks the FTSE Developed All Cap ex U.S. Index. The fund has a low expense ratio of 0.06%, similar to the expense ratio of the Vanguard Developed Markets ETF (VEA). SCHF’s higher exposure to Japan and U.K. is favorable as these two countries have good economic outlook based on their PMIs. Earnings growth is expected to accelerate in 2025 and the fund’s valuation is not expensive either. Therefore, we give SCHF a buy rating.
Fund Analysis
SCHF’s growth was inferior to the S&P 500 index
Let us first review how SCHF has performed in the past. As we have noted in our introduction, SCHF has delivered good return in much of 2023 and 2024. However, the fund’s long-term return was still inferior to the S&P 500 index. In the past 5 years, SCHF delivered a total return of 40.4%. This was inferior to the S&P 500 index’s 95.6%. As can be seen from the chart below, over the span of 10 years, SCHF delivered a total return of only 56.5%. In contrast, the S&P 500 index delivered a total return of 227.3%.
Higher exposure to Japan and the U.K.
SCHF has a high exposure to Japan and U.K. As can be seen from the table below, stocks from these two countries represent over 34% of the total portfolio with Japan representing over 21.7% of the portfolio.
The fund’s higher exposure to Japan is favorable. As can be seen from the chart below, Japan’s composite PMI has been steadily in an increasing trend in the past few years. Since PMI is a forward economic indicator, we are positive on Japan’s economy and SCHF should benefit in the long run.
SCHF’s exposure to U.K. is also favorable as the country’s composite PMI has improved considerably in the past year. As can be seen from the chart below, PMI has improved from below 50 in August 2023 to 52.8 this past July. Therefore, we also have a positive view on the country’s economy.
Earnings growth expected to accelerate in 2025
Below is a chart that shows the consensus earnings growth rates of the MSCI Developed World Ex U.S. Index. Although SCHF tracks a different index than the MSCI index, both have very similar returns. Its composition by countries is also very similar. The major difference is that the MSCI index does not include stocks from South Korea. Given the similarities, we think the chart below will give us good clue of how stocks in the SCHF’s portfolio will also perform. As can be seen from the chart below, earnings growth rate for the MSCI index was negative in 2023. Fortunately, this growth is expected to improve to about 4.3% this year and will accelerate to 9.9% in 2025. In 2026, the growth will remain elevated at 8.7%. Therefore, we think SCHF will likely see average earnings growth accelerated in 2025.
Lack of exposure to higher growth information technology sector
Although SCHF’s earnings growth in 2025 and 2026 are expected to be much better than 2023 and 2024, its long-term growth outlook is likely going to be inferior to the S&P 500 index. This is because SCHF has a low exposure to technology sector. As can be seen from the chart below, technology sector only represents about 11.1% of its total portfolio. In contrast, technology sector represents about 31.4% of the S&P 500 index. Given that technology is one of the fastest growing sectors with many secular growth trends, SCHF’s lower exposure to technology stocks means that SCHF will likely have lower earnings growth rate than the S&P 500 index.
In fact, consensus earnings growth rate for stocks in the S&P 500 index appears to be much better than the MSCI Developed World Ex. U.S. Index. For reader’s information, technology sector represents about 9.3% of this MSCI index, about 2 percentage points less than SCHF. As can be seen from the table below, consensus earnings growth rates of stocks in the S&P 500 index between 2024 and 2026 are much better than the MSCI index. Therefore, SCHF’s long-term performance will likely be less than the S&P 500 index.
Consensus Earnings Growth |
2024 |
2025 |
2026 |
MSCI Developed World Ex. U.S. Index |
4.3% |
9.9% |
8.7% |
S&P 500 Index |
10.5% |
14.8% |
12.5% |
Source: Created by author, Yardeni Research
Valuation not expensive
Below is a chart that shows the forward P/E ratio of stocks in the MSCI Developed World Ex. U.S. Index. As can be seen from the chart below, the average forward P/E ratio currently trades at about 13.5x. This is not expensive relative to the historical range. Therefore, SCHF appears to be fairly valued.
Investor Takeaway
SCHF should experience better growth next year and its valuation is also not expensive. Therefore, we have a buy rating for the fund. However, given its inferior growth outlook to the S&P 500 index, we do not think investors should overweight on SCHF. Rather, SCHF should be treated as a satellite position.
Additional Disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.
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