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. But it comes with risks inherent to emerging markets that may not be adequately compensated. The fund earns a Morningstar Analyst Rating of Bronze.

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. This strategy weights holdings by market cap, an approach that 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 cap bound to further limit unnecessary trading. 

This well-diversified portfolio mitigates the impact of the worst-performing stocks. As of February 2023, it holds more than 1,800 names and its 10 largest positions accounted for only 21% of assets. The index started including locally traded China A-shares mid-2019 and has since added several other countries, further expanding its reach. 

Chinese stocks accounted for nearly 34% of the portfolio as of February 2023. While this is representative of the relative size and importance of the Chinese equity market, it could also expose the fund to concentration risk.

In general, emerging markets face greater geopolitical risks than their developed 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 an 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 in the largest emerging markets while possessing a level of political risk absent from developed economies. It earns an Average Process Pillar rating.

Average

Process

Schwab has strengthened its equity index management team over the past few years under the leadership of Chris Bliss. It earns an Above Average People Pillar rating.
Bliss leads Schwab's equity index team. Since joining Schwab from BlackRock in 2016, Bliss has strengthened the team by increasing specialization and automating more of the managers' workflow. This allows the managers to spend less time on routine tasks and helps them better identify and resolve issues that require their attention. Chuck Craig and David Rios join Bliss as named managers on this fund. Jane Qin was previously named as manager on the fund, but she left to oversee portfolios in Schwab’s personalized indexing effort in June 2022. 

The named managers have support from associate managers who help the team prepare for index rebalances. The team looks for ways to slightly improve returns by handling some corporate actions differently from the index. The managers can take advantage of those opportunities when they occur, under tight tracking-error constraints.

Schwab compensates its managers based on tracking error and compliance with risk management, which helps align their interests with investors'.

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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