Schwab Emerging Markets Equity ETF SCHE combines a cost-effective approach with an ultralow fee that should help it perform well against its Morningstar Category peers. Investors should still be aware of the higher degree of geopolitical risks in emerging-markets stocks, which can introduce unwanted volatility. 

The fund tracks the FTSE Emerging Index. It covers large- and mid-cap stocks from more than 20 developing nations, including locally traded China A-shares. The portfolio excludes Korean stocks because FTSE classifies South Korea as a developed market. Its market-cap-weighted approach benefits investors by capturing the market's collective opinion of each stock's value while mitigating turnover and trading costs. Occasionally it will increase the fund's exposure to expensive stocks when investors get excited about an area of the market, but that doesn't undermine its long-term efficacy. FTSE institutes a buffer around the lower market-cap boundary to further limit excessive trading. 

This well-diversified portfolio mitigates the impact of the worst-performing stocks. As of January 2024, it held over 1,900 names, while its 10 largest positions accounted for nearly 21% of its assets. The index started including locally traded China A-shares in mid-2019 and has since added several other countries, further expanding its reach. 

Chinese stocks accounted for over 26% of the portfolio as of January 2024. While this represents the relative size and importance of the Chinese equity market, it could also expose the fund to country-specific risks.

In general, emerging-markets stocks face greater geopolitical risks than their developed-markets counterparts. The recent Russia-Ukraine conflict highlights such risk. Shortly after the invasion, FTSE removed Russian stocks from the fund’s target index, and the fund marked its Russian allocation down to zero. Russian stocks represented 3% of the fund at the end of January 2022, so the impact on performance was somewhat muted.

The fund charges a 0.11% annual fee, which is among the cheapest in its category. This ultralow price tag has helped it outperform the category average and should continue to provide a durable advantage.

Analyst Rating

Competitive price tag on a well-constructed portfolio.

Analyst

Lan Anh Tran

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This portfolio captures the composition of the emerging-markets equity universe. However, it is more concentrated among the largest emerging markets while possessing a level of political risk absent from developed economies.  It earns an Average Process Pillar rating.

Average

Process

Consistently tight index tracking and the incremental advantages it offers at the margins underpin an Above Average People Pillar rating for Schwab's equity index team. Its management approach ensures continuity, with multiple managers in place to mitigate the impact of any single manager's departure. This setup, combined with a largely automated workflow, allows the managers to focus on oversight and step in with a hands-on approach when necessary. The team uses industry-standard tools that it supplements with proprietary in-house applications to maintain a robust investment process. The integration of BlackRock's Aladdin platform further enhances each manager's ability to monitor and manage their workflow.

Schwab's team has enhanced its operational capabilities, particularly in the creation and redemption processes that are critical for the fund's liquidity and tracking efficiency. Associate managers play a key role in preparing for index rebalances and managing day-to-day tasks, including corporate actions. This proactive involvement allows the team to seek incremental return improvements by handling certain corporate actions differently than the index, albeit within strict tracking-error constraints. Aligning manager compensation with the fund's tracking error and adherence to risk management protocols ensures that the managers' interests are closely tied to investors' interests.

Above Average

People

Under new but familiar leadership, Schwab Asset Management Solutions maintains its Above Average Parent Pillar rating. 

After the former Schwab CEO was named president of parent Charles Schwab Corporation in 2022, Omar Aguilar, a Schwab CIO since 2011, was promoted to CEO while retaining his CIO role. Under Aguilar's leadership, Schwab remains focused on core-oriented strategies: More than 95% of the firm's fund assets under management are in low-cost index products that are suitable for the biggest portions of investors' portfolios. Index-tracking remains are par with the best teams in the business.

Recent strategic initiatives show a desire to grow in an increasingly competitive landscape. Forays into direct indexing—which customizes separate accounts through tax-loss harvesting, values-based requests, or other client preferences—as well as some new launches, such as Schwab Municipal Bond ETF, fit the firm's strategic focus and are natural extensions of its capabilities. However, other recent launches in more-niche asset classes, including Schwab Crypto Thematic ETF, contrast previous refusals to enter trendy markets. 

Schwab benefits from its association with its parent's brokerage business. This arrangement and efficient operation allow funds to grow quickly and keep fees in line with larger competitors. Historically, Schwab has been quick to match competitor fee cuts and now sports a 0.09% asset-weighted average fee across its mutual funds and ETFs.

Parent

Schwab Emerging Markets Equity ETF

SCHE tracks an index of emerging markets companies weighted by market cap.

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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.

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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.

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Emerging markets continued to expand at a solid pace midway into the first quarter of 2024, supported by broad-based expansion across both manufacturing and service sectors.

Emerging Markets Growth Remains Solid Amid Intensifying Inflationary Pressures

Emerging markets have taken solace in the view that the U.S. hiking cycle is over, helping deliver strong returns in 2023. Slowing global inflation has been due to sharply lower core goods inflation, while service prices have remained stickier.

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By Ed Agostino After the great financial crisis, China's appetite for commodities and technology fueled a global economic recovery. The rest of the world recovered and then grew, largely on the back of China's incredible transformation.

Are Chinese Stocks Un-Investable?

SCHE primarily invests in mid and large caps, with minimal exposure to small caps, and has a low expense ratio and high liquidity. The ETF has underperformed in recent years due to overexposure to China, while other less-exposed markets performed better. In my opinion, the outlook for emerging markets in 2024 will be neutral, with uncertainties in China and Taiwan.

SCHE: Diversifying Through Emerging Markets In 2024

Emerging markets will also be looking closely at economic conditions in mainland China, which will be a key determinant of broader emerging market growth in 2024. A key reason for diverging emerging and developed market performance was the marked variation in demand conditions.

Emerging Markets Conclude 2023 On Better Note Than Developed Markets

Schwab Emerging Markets Equity ETF tracks the FTSE Emerging Index and has a 3% yield. Almost one third of assets is invested in Chinese companies and the heaviest sector is financials. Among close competitors, SPEM and VWO show more attractive characteristics.

SCHE: A Fair Emerging Market Fund, But Not The Best

As China stocks continue to fall, investors may want to ensure their emerging markets exposure diversifies away from the country. China stocks have been pressured by a weakening yuan and waning investor optimism toward the world's second-largest economy.

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The opportunity set is wide and growing wider in emerging markets, according to Franklin Templeton Emerging Markets Equity. The BRICS summit in South Africa in August announced the expansion of the group to include potentially six new members in early 2024.

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Many investors are wondering if it's the right time to add exposure to emerging markets. With ongoing market uncertainty and the possibility of a recession, investors may be wary to add exposure to riskier segments of the market.

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Investors have pulled back but stocks could take off if intensified steps to bolster the post-Covid-19 recovery pan out.

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Many emerging markets investors are looking to diversify away companies under Chinese President Xi Jinping's control without sacrificing performance. A solution for investors may be the Hartford Multifactor Emerging Markets ETF (ROAM), which underweights mega-cap tech and China compared to category peers and the benchmark MSCI Emerging Markets index.

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The Schwab Emerging Markets Equity ETF has attractive valuations and improving fundamentals in emerging markets, but its high exposure to China and its underperformance compared to the S&P 500 makes it a risky investment. Despite a decline in 2022, SCHE has stabilized in 2023, and its valuation is more attractive, with the revised Buffett Indicator showing that the market valuation of the top countries in SCHE's portfolio as either fair or cheap. However, the ETF's high exposure to China, which faces potential long-term economic challenges, and its underperformance compared to the S&P 500 due to the higher risk of emerging markets, make it a less desirable long-term holding for investors.

SCHE: Attractive Valuation But Exposure To China Is Way Too High

SCHE, and emerging markets more broadly, have had a decent start to 2023. I think this is a story that can continue in the months ahead. The base case is that the U.S. and other developed markets may be entering a recessionary period. By contrast, many emerging markets like China are expected to see stronger growth.

SCHE: I See Emerging Markets As A Buy Now (Rating Upgrade)

The liquidity crisis impacting selected developed market banks has unnerved emerging market investors. Markets have recovered from the turmoil following the liquidity crisis impacting some banks in the United States and Europe.

Emerging Markets Insights: Emerging Market Banks Are Resilient

SCHE's portfolio is less risky, due to high level of diversification, low expense ratio, lower volatility, and investing in right sectors in the most promising EMs. SCHE has been paying low but decent yields. Lower risk and potential growth of equities in emerging markets are expected to sustain the current level of yield.

SCHE: Robust Emerging Market Fund, Offering Decent Yield And Total Returns

Emerging markets have weathered tightening financial conditions. We now see a relatively good backdrop for EM assets as EM rates peak and China reopens.

Brighter Backdrop For Emerging Assets

In an economic downturn, higher-growth EM stocks that have derated and have strong and stable earnings could outperform, in our opinion. In China, we are cautiously positive on possible policy changes ahead and early signs of a roadmap out of zero-COVID.

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Two ETFs SCHE and VBND traded with an outsized volume yesterday.

2 ETFs to Watch for Outsized Volume on Emerging Market & Broad Market

Schwab Emerging Markets Equity ETF tracks The Financial Times Stock Exchange 100 Index (FTSE) emerging Index, less fees and expenses. SCHE invests in over 20 emerging markets with its largest stakes in China and India.

SCHE: A Stable Foray Into Large- And Mid-Cap Emerging Markets

Emerging markets have struggled in 2022, along with most of the market. Looking ahead to the new year, I see more of the same. China has been a headwind, and that could change as the country re-opens. This is a big opportunity in normal times, but I see geo-political risks outweighing some of the potential.

SCHE: My Outlook For Emerging Markets Is Cautious For 2023

Emerging markets remain resilient despite headwinds, but many investors have shied away from the asset class. We believe emerging markets are better positioned to weather current challenges versus developed markets due to factors including effective monetary policy and low debt.

Emerging Market Equities - Why Now?

SCHE, and emerging markets more broadly, have had a difficult time over the past year. While that is true for developed markets as well, EM has underperformed. While there is a valuation gap that could pique investor interest at these levels, I see too many headwinds to really get comfortable with this space.

News for Schwab Emerging Markets Equity ETF ETF (SCHE)