The Schwab U.S. Large-Cap ETF (NYSEARCA:SCHX) is a low-cost, passively-managed option if you want broader exposure to the market. Having this broader exposure has made the ETF perform quite interestingly over the past few years, and it’s worth taking a serious look at.
The ETF holds everything from your usual large caps to more under-the-radar businesses that are neither in the S&P 500 nor in the Nasdaq-100. Thus, you’re giving your portfolio some much-needed diversification beyond the companies that everyone else holds.
Is this exposure worth it, or should you stick to what’s popular? Let’s take a look.
Your portfolio does have a gap
If you take a look at your current portfolio, you are either an income investor that is heavily into dividends, or you are a tech investor that is heavily into tech, or you just have a barbell strategy where you own balanced portions of both.
Either way, your portfolio is missing out on a critical piece of the economy. There are companies that are small enough not to be included in the S&P 500, while being big enough that mid-cap ETFs miss them.
SCHX can cover this gap somewhat. SCHX still assigns weight based on market capitalization, so the exposure you do get is small.
How SCHX has performed with a broader set of stocks
The most surprising aspect of SCHX is that it has been neck and neck with the S&P 500 for as far as you can go. Since its inception, SCHX has delivered 860% in gains, whereas the S&P 500 has delivered 867%.
The top holdings are almost identical to those of the S&P 500, but the weighting at the top is slightly trimmed. The S&P 500 assigns an 8.09% weight to Nvidia (NASDAQ:NVDA | NVDA Price Prediction) while SHCX assigns 7.75% and shifts the difference to those extra stocks at the bottom.
So what exactly is the difference here?
When you have two ETFs that are identical in terms of performance and also in dividends, what you need to look at is liquidity and expense ratios. The size of the ETF should be enough of a barometer to judge liquidity. Here, the SPY (NYSEARCA:SPY) has $768.7 billion in assets and has the most liquidity available. This means if you are regularly selling and buying this ETF, you’re going to see the lowest bid/ask spreads.
This isn’t an issue if you plan to hold for a long time, and this is where SCHX looks like a much better option.
The expense ratio is just 0.03%, or $3 per $10,000. SCHX is three times cheaper than the SPY. The ETF comes with just $71.5 billion in assets, but this does not matter since the lower expense ratio will compound your returns and will account for any bid/ask spreads in the future when you finally sell.
Not only that, the PE ratio for SCHX is slightly lower at 27x vs 28x for the SPY. Those extra holdings are making the ETF a bit cheaper.
Why I’ll buy SCHX
SCHX is cutting very close to SPY alternatives that also track the S&P 500, but offer a lower expense ratio. That said, I do think SCHX is worth buying due to its slightly lower exposure to the mega caps. You are getting comparable performance to the S&P 500 while capturing a broader slice of the market, and getting all that with a lower expense ratio.
If the market sees a tech-driven correction anytime soon, I expect SCHX to be protected slightly more.
Other than that, the differences are going to be minute. This is not a game-changer for your portfolio, and your returns will still be almost identical to the S&P 500.
Will you buy the S&P 500? If yes, buying the SCHX also makes sense for a little bit more diversification + lower fees.
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