Why SCHV Remains a Strong Buy for Long-Term Investors in a Rising Rate Environment

The investment landscape is shifting. For years, growth stocks dominated portfolios as central banks kept interest rates near zero, fueling speculative bets on future earnings. But as inflation surges and monetary policy tightens, the pendulum is swinging back to value investing. For long-term investors, the Schwab U.S. Large-Cap Value ETF (SCHV) offers a compelling case: a low-cost, diversified vehicle to capitalize on the structural advantages of value stocks in a rising rate environment.

The Historical Case for Value in Rising Rates

Value stocks have historically outperformed growth stocks when interest rates rise. This is not a coincidence. Value equities—characterized by strong earnings, high dividend yields, and conservative valuations—are inherently better positioned to weather higher borrowing costs and tighter monetary policy. Growth stocks, by contrast, rely on discounted future cash flows, which lose luster when interest rates climb.

Consider the data: Since late 2020, the MSCI World Value Index has outperformed its growth counterpart by over 15% year-to-date, reversing a 13-year underperformance streak. Even in 2022, when the Federal Reserve aggressively hiked rates, SCHV delivered a -7.65% return—outperforming the S&P 500's -20% drop. Over the long term, the fund's 10-year compound annual growth rate (CAGR) of 10.54% and 15-year CAGR of 11.56% underscore its resilience.

Why Value Thrives in Economic Normalization

The current macroeconomic environment mirrors the post-1990s tech bubble. Growth stocks, particularly in sectors like software and media, trade at extreme valuations, while value sectors such as energy, industrials, and financials remain attractively priced. For example, energy stocks saw triple-digit earnings growth in 2021 but still traded at single-digit P/E ratios. This mispricing creates fertile ground for value outperformance.

Rising interest rates also tilt the playing field in favor of value stocks. Higher rates increase the cost of capital, making it harder for growth companies to justify their lofty valuations. Meanwhile, value stocks—often with strong cash flows and lower debt—can sustain earnings without relying on speculative future growth. This dynamic is evident in sectors like financials, where banks benefit from wider net interest margins in a higher-rate world.

SCHV's Edge: Low Cost, Diversified Exposure

SCHV's appeal lies in its simplicity and efficiency. With an expense ratio of just 0.05%, it provides broad exposure to U.S. large-cap value stocks, including leaders in energy, industrials, and consumer staples. This diversification mitigates sector-specific risks while capturing the broader value rotation.

Moreover, SCHV's portfolio is weighted toward companies with strong balance sheets and consistent earnings. For instance, its top holdings include energy giants like ExxonMobil and industrials like Caterpillar—firms that have historically outperformed during inflationary cycles. In contrast, growth-centric strategies often concentrate in a handful of high-flying tech stocks, exposing investors to volatility and valuation risk.

Navigating Volatility with a Long-Term Lens

While short-term volatility is inevitable, value investing's strength lies in its long-term compounding power. Even during the 2022 rate-hiking cycle, SCHV's -7.65% return paled in comparison to the S&P 500's -20% drop. Over the 15-year period ending 2025, SCHV's 179.72% total return highlights its ability to deliver consistent gains despite periodic downturns.

For investors, this underscores the importance of patience. Value stocks may lag during speculative booms, but they tend to shine when markets recalibrate. With inflation and interest rates likely to remain elevated for years, the case for SCHV grows stronger.

A Strategic Allocation for the Future

For long-term investors, SCHV should be a core holding in a diversified portfolio. Its low cost, broad exposure, and alignment with macroeconomic trends make it an ideal counterbalance to growth-centric strategies. While growth stocks may still outperform in certain sectors (e.g., AI, clean energy), the structural advantages of value investing—strong earnings, defensive characteristics, and attractive valuations—position SCHV to deliver superior risk-adjusted returns over time.

In a world of economic normalization and market volatility, SCHV offers a proven path to resilience. As the Fed continues its rate hikes and inflation remains a persistent challenge, the time to embrace value is now.