JENNA DAGENHART:  Hi, everyone. Thanks for joining us today. I’m here with DJ Tierney, head of the Investment Portfolio Strategy team supporting Schwab Asset Management. 

Well, DJ, there’s been a lot of talk around concentration risk in US stocks due to the rally in the Magnificent 7. How would you characterize their impact? 

DJ TIERNEY:  Well, as most investors know, the Magnificent 7 refers to Microsoft, Apple, Amazon, Nvidia, Alphabet, Meta, and Tesla. These mega-cap stocks more than doubled on average in 2023, earning them their nickname. But as the third quarter this year demonstrated, last year’s pace of remarkable gains for these mega-caps was probably unsustainable over the long run. After all, the top four stocks already represent more than 20% of the S&P 500 Index, and we think that advisors and their clients should keep this concentration risk in mind, especially given the market’s leadership rotations since mid-July. 

JENNA:  Thanks, DJ, but where can advisors turn if they’re worried about a client’s mega-cap concentration risk in US stocks? 

DJ:  Well, one approach might be to select an index whose weights are not tied to price. Equal-weight strategies fall into this category, but equal-weight presents its own challenges. In equal-weighting, sector weights can potentially seem arbitrary because the number of companies usually matters more than their relative size. In addition, trading costs can be higher in equal-weighted strategies than in cap-weighted strategies, as the indices weight small, possibly illiquid companies the same as the largest. 

Given these considerations, we think that the Fundamental Index methodology can be a more effective approach than equal-weighting. Fundamental Indexing weights companies based on fundamentals, or their economic footprint, for measures like revenue, cashflow, and dividends. This methodology still breaks the link between stock price and index weight. Its bottoms-up approach means that sector and even country weights for international stocks are reflective of the economic scale of the companies within each sector and region. Fundamental Index weights, therefore, are different than market-cap-weighted indices, like the S&P 500 Index, that have the concentrated positions in Magnificent 7. 

JENNA:  Finally, following up on your points, DJ, what products does Schwab Asset Management offer that follow the Fundamental Index methodology, and how might an advisor fit them into a client’s portfolio? 

DJ:  Schwab Asset Management has managed Fundamental Index products for 17 years,  and has grown into the largest provider of index funds and ETFs based on this approach, sometimes categorized as strategic beta, developed by Research Affiliates. Schwab’s Fundamental Index lineup includes six ETFs and six index mutual funds that span domestic, developed, and emerging equity markets, with over $65 billion invested as the end of October. 

In terms of implementation, we like to say better together. Rather than choose one or the other, we think it makes sense to blend Fundamental Index strategies and market-cap strategies at the core of a diversified portfolio. Since Fundamental Index strategies typically vary, result in varying exposures to value stocks, the client’s risk tolerance and ability to accept the increased tracking error to traditional cap-weighted benchmarks becomes important when selecting the optimal blend. 

Should any of your viewers want to learn more about our products, they can reach out to their Schwab Regional Director or wholesaler, or visit us at schwabassetmanagement.com. 

JENNA:  Well, thanks, as always, DJ, and to our viewers, thank you for watching. 

For Asset TV, I’m Jenna Dagenhart. Before signing off, please take a moment to review the disclosures that follow.

As of 10/31/24, total AUM for the Schwab Fundamental Index® ETFs and Mutual Funds were: $65,747,357,213.

Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can view and download a prospectus by visiting www.schwabassetmanagement.com/prospectus. Please read it carefully before investing.

Past performance is no guarantee of future results, and the opinions presented as an indicator of future performance. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

Some of the statements in this video may be forward looking and contain certain risks and uncertainties. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Supporting documentation for any claims or statistical information is available upon request.

There can be no assurance that the Fundamental Index® methodologies will achieve their desired outcomes. Each investing strategy involves its own set of unique risks and benefits.

Fundamental Index is a registered trademark of Research Affiliates, LLC.

Visit: https://www.schwabassetmanagement.com/strategic-beta-solution for information about Schwab Fundamental Index ETFs and Mutual Funds, and to search for specific product information, including pricing, performance, and holding, visit: https://www.schwabassetmanagement.com/prospectus.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Cap-weighted indexes invest in stocks relative to their total market capitalizations.

Equal-weighted indexes invest the same amount of money in the stocks of each company in the index.

Cash flow is the amount of money that moves into and out of a company over time.

Strategic beta funds track non-market-cap-weighted indexes and may help alter a portfolio’s overall risk, improve its return profile, and diversify exposure to achieve a desired outcome.

Tracking error is the divergence between the price behavior of an investment and an index. It is calculated as the standard deviation of the return on the investment minus the return on the index.

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