Evaluating Performance
In my previous analysis of the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD), I held a neutral/hold rating. I also anticipated that the JPMorgan Equity Premium Income ETF (JEPI) would outperform SCHD. Let’s assess how these predictions have fared:
SCHD has delivered a return of +9.6% on a total shareholder basis, notably lower than the S&P500’s (SPY) return of 18.13%, resulting in a negative alpha of 8.53%. This was a significant deviation from my assessment. In retrospect, a bolder stance, perhaps even issuing a sell recommendation, was warranted given the end of SCHD’s Alpha Party.
Reflecting on missed opportunities to be assertive in my calls and drawing confidence from recent assessments, such as those on Ares Capital (ARCC) and Berkshire Hathaway (BRK.B) (BRK.A), I have been more emboldened in my ratings, always keeping a keen eye on relative performance against the S&P500, the defined benchmark/opportunity cost.
Assessing the JEPI outperformance thesis against SCHD, both funds have returned around +9.60%, indicating that my initial prediction did not significantly materialize. However, a closer examination reveals that the anticipated alpha has effectively nullified over the recent months, thereby resulting in a neutral performance.
Upgrading SCHD to a ‘Strong Buy’
I am revising my stance on SCHD from ‘Neutral/Hold’ to a ‘Strong Buy’, expecting it to outperform the S&P500 (SPY). The rationale for this upgrade will primarily focus on comparing the net exposure profiles of SCHD and SPY:
Assessing Net Exposures of SCHD vs SPY
The graphical summary of the net industry-level overweight and underweight exposures of SCHD compared to SPY presents a compelling overview. Further analysis of the specific values and key industries reinforces my belief in the favorable net exposure.
Further scrutiny of the net sector-level exposures forms the bedrock of my preference for SCHD over SPY. This data underscores the basis of my thesis, offering a valuable reference point.
Favorable Underweight Exposures
Systems and Application Software, Information Technology
SCHD exhibits a 16.0% underweight stance compared to SPY in the Information Technology Sector, with Systems and Application Software contributing significantly. This positioning is advantageous due to the current high valuations of the US technology sector, presenting a narrow margin of safety for potential investors.
Transaction and Payment Processing Services
SCHD’s 2.4% underweight exposure to the Transaction and Payment Processing Services Industry aligns with my preference, considering the evident growth moderation in this sector. For example, recent analyses of PayPal (PYPL) and Block (SQ) demonstrate a notable deceleration in growth, signaling a need for cautious optimism in this segment.
