🗞 Emergency Meeting 02/05

WHILE YOU POUR THE JOE… ☕️

The Schwab dividend ETF has outperformed nearly everything since the start of this year. 📈 

That’s unusual, as a boring name like this one barely has anything to offer over the high-growth narrative in AI and commodities like Gold or Copper.

However, we’re not here to argue with the market.

We’re here to uncover why this is happening and whether we can squeeze more alpha out of this rotation.

It all begins at the institutional level, specifically spotting factors that are helping names like SCHD gain all this newfound momentum.

Speaking of factors, let’s get on with today’s email 📧…

STRATEGY 101
What Markets Like

This is what the ETF holds right now, as you can see it is pretty concentrated in:

• Staples

• Energy

• Health Care

• Industrials

In true investment banker/hedge fund portfolio manager fashion, I ran through the numbers and attempted to spot what all these have in common along with SCHD.

It all came down to the following factors and their shifting regimes:

• IVE / IVW value factors

• IJR / SPY size-preference factors

• TLT / SHY rate sensitivity factors

Essentially, these are the drivers behind the price action in most financial assets, even Bitcoin.

So let’s see what the market has liked and disliked, starting in a previous cycle covering 2015-2020.

Think of this chart as a mirror image of price action, as we are not looking to gauge how a factor did, but rather look at where premiums/discounts are harvested.

Here’s a cheat sheet: ⬇️ 

• The higher a factor goes (like IVE/IVW), the more expected upside there is

• The opposite is true for a declining factor (like MTUM/QUAL covering momentum

From 2020 to 2022, it was the IVE/IVW factor that outperformed the most, at a hefty 116%. 🔥 

Not bad for a couple of ETFs, eh?

Now let’s jump to what these factors, and SCHD, look like today:

Not quite the same as 2020, but pretty damn near in my opinion.

It looks like the biggest premium harvesting is set up in:

• TLT/SHY rates sensitivity (long duration bid exposure)

• IVE/IVW value bid exposure

• IJR/SPY small-mid cap bid exposure

• SCHD over SPY bid exposure

So far, all of these have started to pay off, as you can see, IJR is having its best day vs the QQQ since 2024 ⬇️ 

Now for some math.

We want to know why SCHD is outperforming, and why its specific composition in Staples, Energy, Health Care, and Industrials matters.

I ran some regression tests to help me explain this.

For the 2020-Present period, 66% of SCHD’s price action can be explained by two of these factors:

• IVE/IVW value exposure

• QUAL/SPY quality balance sheet exposure

Seems obvious at this point, as the three sectors SCHD most heavily invests in all carry a major component of value and quality balance sheets.

We can now move forward and select some sectors of our own that all share in this dynamic.

Out of all sectors in the United States, there are a few that share in these characteristics.

Such as falling P/E multiples (value), rising EPS growth (size-preference), and quality bids (high P/B).

When we dig into these areas, and carry the same factor filter through, it becomes obvious why the following names are outperforming in a red day for stocks:

• VVV (up 6% yesterday)

• CLX (up 1.5% yesterday)

• HSY (up 1% yesterday)

All of these are highly exposed to the same factors, and all have harvested a massive premium (of over 50%) relative to the S&P 500 performance.

In other words, a double tailwind.

That’s enough evidence and proof for now.

Your job moving forward is to ONLY consider names that are correlated to:

• IVE/IVW

• IJR/SPY

• QUAL/MTUM

This will increase your odds of success, at least it has done for me (I was in VVV as all Deal Room members know).

To your success,

G 🫰