Investors love an ETF that offers a perfect balance between a good yield and some upside. The Schwab US Dividend Equity ETF (NYSEARCA:SCHD) was the perfect fit, and it became one of the most well-known stocks in the market. However, the upside portion of that equation has been missing at a time when the broader market is seeing an unceasing rally.
SCHD’s performance has been -0.25% in the past year, as of this writing. It only turns positive when you factor in the dividends. If you stretch the timescale back to the start of 2022, SCHD has again only appreciated by some 2% since then.
This is an unacceptable performance for many who’ve seen ETFs like the Vanguard High Dividend Yield Index Fund ETF (NYSEARCA:VYM) whiz by with a fat 11.08% return in the past year.
So, is it time to dump SCHD once and for all and move elsewhere? I disagree, and here’s why.
Why SCHD has underperformed in recent years
SCHD is the kind of ETF you want to hold over decades, and if there are stretches where it underperforms, that is to be expected. Let’s take a look at what caused SCHD to underperform recently.
First things first, though, I’ll begin by taking a look at the aforementioned VYM ETF. It’s performing very well and comes with a 2.41% dividend yield. That’s nowhere near SCHD’s 3.78%, but the capital appreciation is still enough for a dividend investor to contemplate ditching SCHD for VYM.
But do you know what the secret is?
VYM’s largest holding is Broadcom (NASDAQ:AVGO) with an 8.24% weighting. This is followed by JPMorgan (NYSE:JPM) at 4.17%. Financials and Technology stocks together constitute some 39% of VYM. As expected, it has done very well, but the downside risk is quite high.
SCHD’s sector breakdown shows Energy sector stocks at 19.69%, followed by Consumer Defensive stocks at 17.94%, and Health Care sector stocks at 17.46%. The top holding is Merck (NYSE:MRK) with a 4.61% weighting. This is a stronger composition that will allow SCHD to weather recessions better. Concurrently, this composition is making SCHD miss out on the tech rally. That’s mostly to blame for its underperformance.
Don’t ditch SCHD before taking this into account
It’s completely okay to trim some SCHD holdings if you want to chase more growth, but you may be taking on more risk, especially with certain ETFs. Covered-call ETFs are drawing lots of attention right now, as they are tracking popular tech indices that have done really well.
Some of them give you a double-digit yield and healthy upside through options.
Be that as it may, it pays to be skeptical. These ETFs have done and will do very well through a rally, but if a downturn hits, you’re going to be much more exposed to the downside risk than the upside. The famous JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) has been unable to claw back to 2025 highs after the selloff this spring, because the ETF’s composition limits upside while you take downside risk close to that of the original index.
Does that mean you should avoid JEPI entirely? Not at all. You can still buy it if you expect the tech rally to continue, but having SCHD in your portfolio can add the ballast you need if a downturn hits unexpectedly.
SCHD is still the King if you zoom out
If you look at SCHD’s capital appreciation chart, it looks woefully uninviting. Once you factor in the reinvested dividends, everything changes.
Here’s SCHD vs VYM. The long-term trendline still shows SCHD in the lead.
Here’s SCHD against JEPI since the latter’s inception.
I could go on…
Anyhow, you’ll quickly realize that ETFs beating SCHD are usually riskier and/or contain lower dividends, and they’ve only gotten ahead just recently. SCHD has historically been a great holding, and I expect it to continue outperforming if you plan to hold for decades instead of years. I wouldn’t fully ditch it.