Try SCHX for Cheap Large Cap ETF Exposure


For American investors focused on the U.S. market, events went quite well in the first quarter. Stocks broadly moved higher thanks to solid data and minimal clouds on the horizon, while many are expecting strong returns ahead as well.

Now that we are in Q2 though, data hasn’t been quite as favorable, with some key figures like retail sales and jobs, giving underwhelming reports. Still, the market has been able to largely shrug these items off and broadly move higher.

The focus now is on large caps, as the added risks and the big run up in Q1 have dulled the appeal of riskier small cap shares. This has left many focusing in on large cap ETFs which offer up solid dividends and a great level of safety.

While many investors zero in on ETFs like IVV and SPY, there is also another great choice out there the Schwab U.S. Large-Cap ETF (SCHX). While this fund is quite similar to others in the space, it does beat out others in the field on cost (read ETFs for 3 of the Cheapest Markets in the World)

When compared to other broad based large cap equity ETFs, this fund has a major advantage in terms of expenses. The largest and the most popular large cap ETF, the SPDR S&P 500 ETF (SPY) has an expense ratio of 9 basis points and the iShares Core S&P 500 (IVV) charges 7 basis points.

Compared to these broad based large cap ETFs, SCHX charges a paltry 4 basis points in fees and expenses making it one of the most cost effective ways to gain a basket exposure in the large cap space.

SCHX in Focus

The ETF was launched in November of 2009 and tracks the performance and yield of the Dow Jones U.S. Large-Cap Total Stock Market Index before fees and expenses. The index is a float adjusted market capitalization weighted benchmark and measures the performance of the large cap space in the U.S. equity markets. It is comprised of a universe of 750 stocks in all.

SCHX has a fairly large sample size of 750 stocks which is comprised of predominantly large cap stocks with some mid caps filling out the rest of the portfolio. Considering this fact, most investors would give SPY a higher rank over SCHX in terms of a pure play in the large cap U.S. equity space (see 3 Ways to Play the S&P 500 Rally with ETFs).

However, this is clearly not the case. SCHX has a beta value of 0.99 and an R-Squared value of 99.56% versus the S&P 500 making the ETF almost perfectly (positive) correlated with the large cap U.S. equities. The reason is that mid caps which are included in the ETF receive relatively smaller weight due to the market capitalization weighting technique of the ETF.

SCHX has a maximum exposure in Information Technology (18.40%), Financials (16.60%), Consumer Discretionary (12.10%), Healthcare (11.70%) and Energy (10.70%). From an individual holdings point of view Apple Inc., Exxon Mobile, General Electric, Chevron, IBM and Microsoft Corp are among some of its biggest holdings (see ETF Option Strategy: Bull Call Spread).

The ETF returned 16.09% for the fiscal year 2012. SCHX currently has a Zacks Rank of 3 or Hold with a Medium risk outlook.

Bottom Line

While it is true that the outlook for U.S equities certainly remains on the positive side, concerns are still present over an earnings slowdown on the corporate front. Nevertheless, with lack of clarity over sector specific performances in the near term, broad market ETFs might still be the darling of investors for the time being as they were in the previous quarter (read Q4 ETF Asset Report: Broad Market ETFs Reign).

Given this, investors may want to look at this cheaper fund for exposure. A few basis points might not seem like a lot, but over time, this can really add up, suggesting that at least a few investors should make a closer inspection of this somewhat-overlooked ETF in the large cap space.

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