Investors who have placed their confidence in the S&P 500 are enjoying substantial returns, with expectations of over 25% gains for the second year in a row, largely fueled by the performance of large-cap growth stocks. The S&P 500 has consistently shown its strength as a market index, achieving a 28% total return year-to-date, supported by an estimated 10% growth in earnings. However, as the valuations rise—evident in the high price-to-earnings (P/E) ratios not seen in two decades—apprehensions are growing regarding the index’s ability to sustain this momentum. Those cognizant of the notion that past performance does not guarantee future results might consider alternative investment strategies that offer different means of equity exposure, particularly options beyond the traditional market-cap-weighted indexes.
Two notable alternatives include the Schwab U.S. Equity Dividend ETF (SCHD) and the Astoria U.S. Equal Weight Quality Kings ETF (ROE). The SCHD, with assets around $68 billion, specifically targets dividend growth by selecting stocks that have demonstrated a track record of at least ten consecutive years of dividend payments, along with meeting specific liquidity and market cap criteria. With an impressive yield of 3.49%, SCHD’s dividend growth average over the last five years stands at 12%. Its cost-effectiveness is also noteworthy, characterized by a low expense ratio of 0.06%, making it an intriguing choice for income-focused investors. Moreover, compared to the S&P 500 (SPY), SCHD exhibits a much lower P/E ratio of 18.4, hinting at its valuation advantage.
Despite these attractive features, there are inherent risks associated with SCHD. The fund’s concentration in its top ten holdings—valued at 40.5% of the portfolio—raises concerns about its diversification. Its three largest positions, Cisco, Bristol Myers Squibb, and Home Depot, make up around 4% to 5% each of the fund. Furthermore, SCHD’s reduced exposure to high-growth sectors, particularly technology, could lead it to lag behind the performance of growth-oriented investments like SPY. In fact, year-to-date performance data reveals that SCHD’s 19.6% total return significantly trails the S&P 500, largely attributable to its value bias and lower technology allocation.
Conversely, the Astoria U.S. Equal Weight Quality Kings ETF (ROE) offers a distinct approach through its equal-weight strategy focused on quality companies while trying to maintain sector parity with the S&P 500. This ETF, launched with over $150 million in assets, utilizes proprietary metrics to select stocks with a market capitalization exceeding $5 billion while emphasizing earnings growth, sales growth, and dividend potential. Since its introduction in August 2023, ROE has posted a 25.2% total return, outpacing the basic S&P 500 equal-weight index. A standout feature is its significant earnings growth of 11.6%, surpassing the performance metrics of its peer, the equal-weight RSP ETF.
While the Astoria Quality Kings ETF does come with a higher expense ratio of 0.49%, its rigorous screening process aims to enhance returns by focusing on higher-quality stocks. This distinction underscores the belief that quality investments tend to yield favorable outcomes over longer periods. Both ROE and its equal-weight peers present a compelling argument for a different investment philosophy, steering clear of the value bias that often characterizes traditional equal-weight indexes, thereby preparing investors for varied market cycles.
Ultimately, the decision to diversify away from the S&P 500 is neither straightforward nor universally appropriate. Alternative strategies such as SCHD and ROE each come with their unique sets of advantages and risks. Transitioning to equal-weight ETFs, for instance, can lead to increased exposure to smaller-cap companies, while dividend-focused ETFs like SCHD introduce a value element, contrasting with the growth emphasis of the S&P 500. Investors need to carefully weigh these alternative strategies’ implications on their portfolios, recognizing the potential for deviating from benchmark performance while enhancing diversification.
In conclusion, investors should take a personalized approach to their investment strategies. The S&P 500 has certainly showcased strong performance, but broadening equity exposure through alternative ETFs like SCHD and ROE can enhance diversification and align with individual risk tolerances and investment goals. Deliberate consideration of each option’s underlying principles and market factors will ultimately guide investors in determining the best path forward for their portfolios in an ever-evolving market landscape.