SCHA vs. IJR: Schwab’s Small Cap ETF Underperforms Big Dog (NYSEARCA:IJR)

(This article was co-produced with HOYA Capital Real Estate.)

prologue

In this article Schwab US Small Cap ETF (NY SEARCA: SCHA), iShares Core S&P Small Cap ETF (NYSEARCA: IJR), and each index used.this The U.S. stock market segment receives less attention in the media and elsewhere like the S&P 500 index (SP500) or the Dow Jones Industrial Average (DJI)in stock. It can lead to lost opportunities. Since 1972, small-cap stocks have outperformed the large-cap stocks in which most individuals and large institutions invest heavily.

That said, the forgotten strain in the middle gave the best results. Things change when you look at the past decade, when large caps were the clear winners.

A mean-reverting investor might look at both charts and jump on the small caps.of The following graph of WisdomTree shows that it may already have started.

Where the returns of the last decade have come from is this, because the performance of small-cap stocks was driven by stocks in which companies lost money, while large-cap stocks’ performance was dependent on stocks with high P/E ratios. may support the idea.

Many expect 2023 earnings to dip from 2022 due to ongoing supply issues, including labor, as well as the increased cost of employees they are having.

Schroders notes that the rotation began in early 2022, despite past economic conditions that favored large caps. One theory they put forward is that small-cap stocks have already priced in all the “bad” news, with large- and small-cap P/E ratios at their lowest levels in 20 years.

Of course, this assumes things haven’t changed in the investment world over the past half-century. More on this later in the Portfolio Strategy section.

Schwab US Small Cap ETF Review

Seeking Alpha describes the ETF as follows (emphasis added):

The Schwab US Small-Cap ETF is an exchange-traded fund launched and managed by Charles Schwab Investment Management, Inc. This fund invests in the US public equity market. The fund invests in shares of companies operating in diverse sectors. The fund invests in small cap growth and value stocks. The fund Dow Jones U.S. Small Cap Total Stock Market IndexSCHA was started in 2009.

Source: seekalpha.com SCHA

SCHA has $13.4 billion in assets under management (“AUM”) and a TTM yield of 1.3%. Schwab’s fee is only 4bps.

index review

of Dow Jones U.S. Small Cap Total Stock Market IndexA member of the Dow Jones Total Stock Market Indices family, the Index is designed to measure the performance of US small-capitalization stocks. The index includes components ranked 751-2500 by market capitalization. The index is a float-adjusted market capitalization weighted index and is rebalanced quarterly. The following characteristics were provided:

Including the largest 750 stocks raises the average to $9.5 billion and lowers the median to $715 million.

SCHA Holdings Review

This ETF is currently the only ETF based on this Small Cap Dow Jones Index. Sector allocation is as follows:

Unlike some large ETFs, there is no single dominant sector, usually technology, with five sector weights above 12%. The largest 20 positions out of over 1750 represent less than 6% of his portfolio. No single stock or group of stocks has a significant impact on performance.

To maintain its cash investment, SCHA holds 6000 contracts of March R2000 Emini futures.

SCHA Delivery Review

As the reader will see later, this payout pattern is somewhat different from what IJR did, but the yield offered is slightly below IJR. Asking for alpha only gives SCHA dividends a ‘C’ grade.

iShares Core S&P Small Cap ETF Review

Seeking Alpha describes the ETF as follows (emphasis added):

The IJR ETF invests in the stocks of companies operating in diverse sectors. Invest in small-cap growth and value stocks. The fund S&P SmallCap 600 IndexIJR started in 2000.

Source: seekalpha.com IJR

IJR has $67.8 billion in assets under management, about five times that of SCHA. Both TTM’s yield (1.36%) and iShares’ fees (6bps) are roughly in line with his SCHA.

index review

S&P provides a PDF describing the index.

IJR Holdings Review

IJR holds far fewer securities, just under 700, almost 1000 less than SCHA.

We will compare sector assignments later. Ignoring his largest holding, cash, the next 20 shares represent his 10% of the portfolio. Still, no stock is more than 1% of the portfolio.

IJR owns 2188 contracts of R2000 Emini futures and remains fully invested.

IJR delivery review

Until recently, payments were only slightly volatile, but not after late 2021. Given that the yield is below his 1.4%, income is not the primary goal of IJR’s investors. Seek Alpha gives IJR a ‘B’ dividend rating.

Compare ETFs

added data for SPDR S&P 500 ETF (SPY) See how “going smaller” affects holdings.

Both small-cap ETFs have better value ratios than SPY, but SPY has a better growth ratio, which also favors SCHA over IJR. The above is a snapshot from that time. The next two show what all three offered investors, starting with returns.

Here we can see that the IJR ETF has closely matched the SPY ETF’s total return since the SCHA’s launch in 2009. SCHA lags behind both. PortfolioVisualizer data can be used to compare risk statistics.

So SCHA did it by experiencing not only the lowest return, but also the highest StdDev. Combining IJY and SPY shows some risk and reward benefits, but the risk ratio analysis adds risk to not owning large-cap exposure.

Seeking alpha grade or rank US ETFs: SCHA on the left, IJR on the right.

Portfolio strategy

Recent performance seems to indicate that the rotation from large-cap to small-cap stocks has begun. Even if that were true, the market-timing investor needs to know if it will hold up. Economic reasons aside, it promised some thoughts on whether the market itself has changed, and whether that will affect the depth and length of small-cap outperformance. We have seen:

• The invention of index-based ETFs as a major player on the demand side. A few funds screen his P/E ratio for negative, but most funds just buy the market. All of the largest US equity ETFs focus on large-cap stocks.
• Fixed annuity percentages have dropped significantly, but DC plans + IRAs more than make up for that drop. US households now invest more money in stocks in retirement accounts than in taxable accounts. Most of them are invested in funds.
• Since 1965, foreign ownership of U.S. stocks has risen from 5% to 35%. large cap.
• A combination of factors has increased institutional ownership of US equities from 29% of the total market to 76% between 1980 and 2015. Small-cap stocks are difficult to own at a level that justifies the research costs of covering that market segment.

In short, there are good reasons to think that market conditions may favor large-cap stocks over small-cap stocks. Add the fact that many US stocks are already 80% owned by institutional investors. This limits what is called “floating stock”. This last fact should provide more value to small caps.

Include the following charts that show how things change as you select dates. Removing his SCHA ETF from the previous PV data yields a different result with an additional 9 years of data.

Just as important as keeping an eye on the timeframe is to look beyond what you may have started within that asset class. is created.

The other two were recently compared. VIOO: Comparison of two Vanguard Small Cap ETFs. Based on 10-year CAGR alone, the VIOO ETF is worthy of due diligence.