Market Overview

A Perfect ETF For Frugal And New Investors Alike

A Perfect ETF For Frugal And New Investors Alike

The world of exchange traded funds is a perfect place for those new to investing. Likewise, ETFs remain the places to be for investors looking for cost-effective vehicles.

Plenty of ETFs marry both of those themes.

What Happened

The Schwab US Broad Market ETF (NYSE: SCHB) is an ideal fund for novice investors and penny pinchers alike. While SCHB isn't the cheapest ETF in the U.S., its annual fee of just 0.03 percent, or $3 on a $10,000 investment, puts it in among the least expensive ETFs.

SCHB tracks the Dow Jones U.S. Broad Stock Market Index, a cap-weighted benchmark with exposure to a significant chunk of the U.S. equity market. The fund currently holds 2,432 stocks.

“There are a few benefits of weighting by market cap,” said Morningstar in a recent note. “This approach incorporates the cumulative knowledge aggregated in stock prices to size its positions. It keeps costs low because it doesn’t require fundamental research analysts or skilled stock-pickers, who can be expensive to hire. While the market doesn’t always get things right, it has done a good job valuing stocks over the long haul.”

Why It's Important

SCHB holds more than quadruple the number of stocks that are found in the S&P 500, but the cheap Schwab fund's sector weights are comparable to the S&P 500's. Technology, health care and financial services names combine for 48.8 percent of SCHB's weight compared to about 48.4 percent in the S&P 500.

As such, investors should expect SCHB to perform inline with inexpensive S&P 500 funds over time. Over the past three years, SCHB returned 50.3 percent compared to 50.2 percent for the Vanguard S&P 500 ETF (NYSE: VOO). Both funds had the same annualized volatility over that period.

“From its inception in November 2009 through March 2019, the fund has outpaced the category average return by 2.0% annually with similar risk,” said Morningstar. “Much of its relative outperformance can be attributed to its low-cost advantage. The fund carries meaningful risk. The index it tracks fell by more than the average large-blend peer during the bear market from October 2007 through March 2009. As a passive index strategy, this portfolio is always fully invested, so it won’t miss a rally, but it exposes investors to the full brunt of market downturns.

As Morningstar notes, SCHB's fee is stunningly low compared to the 0.65 percent average for this fund category. The research firm has a Gold rating on SCHB.

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