Its no secret that a fan favorite ETF in SCHD has underperformed the stock market. The overall SPY is up 16.89% Year to Date. The stock market has been on a tear. This has been on the heels of not as bad as expected earnings data, an interest pause and big tech carrying the market. But why is SCHD such an under performer this year? Lets find out.
To answer this question we have to understand the components of these two ETF’s. SCHD is a top tier dividend growth ETF holding 104 companies as of this writing. This ETF also has a dividend yield of 3.59%. These 104 companies are distributed among consistent dividend payers that have a track record of dividend growth and price appreciation. Portfolio distributions are most concentrated in Industrials, health care, financials, consumer staples and information technology.
The SPY is a top tier ETF consisting of 500 of the largest companies in the United States. The fund aims to hold the largest companies by market cap and rebalances as companies grow. If companies are larger than 4.5% then it readjust them quarterly. This helps the ETF not be too overweight in one particular company. Much Like SCHD, The SPY has a wide diversification throughout the sectors however it holds a significantly higher portion in information technology.
Highlighting the difference in the weight of technology in the SPY vs SCHD is a reason for the discrepancy in performance this year. However it actually is the types of tech companies that they hold. SCHD is a dividend focused ETF so names such as Tesla, Nvidia, Amazon are not a part of the ETF because they do not pay a dividend. This is why the SPY has appreciated so much as they are focused simply on Large Cap names.
High value dividend companies such as Pepsi, Coca Cola, Johnson and Johnson have all pretty much remained flat. These are the types of companies that are held in SCHD and are the reason it has not performed with the overall SPY. However SCHD has continued to pay its high dividend yield as the companies held have continued to pay their dividend.
Although SCHD has not performed as well as the SPY it is crucial to understand what you hold and why. For long term dividend investors it would be wise to own both in a portfolio. Holding SCHD for dividend growth and SPY for large cap growth. The goal in SCHD is that the companies that are held will grow and pay a consistent high dividend to investors. This year is the perfect example as tech leads the way, value names have remained steady and consistently paying investors dividends.
2023 is also a great year to showcase the power of diversifying your portfolio and ensuring your have exposure to all sectors of the market. You do not want to be left on the outside of a tech rally. You also do not want to be heavily in tech and nothing else and enduring months of pain during a tech bear market. The key to investing is being able to have the patience for your stocks to grow. Having the discipline to stay in the markets and staying consistent with your investing strategy.
Personally I own both. I’ll continue to dollar cost average into both and let the market do its thing.
Peace!