Don’t buy Schwab US Dividend Equity (SCHD): Buy these ETFs instead

The Schwab US Dividend Equity ETF (SCHD) stock has drifted upwards after falling to $68.50 in May. It has risen by about 5% to the current $72. In all, the shares have dropped by over 4.8% this year compared to S&P 500 index gains of over 10%. 

Tech growth and high interest rates

SCHD is one of the best-known dividend-focused ETFs in the world. It is a leading fund with over $47 billion. As shown below, the fund has continued adding assets this year, with January being its best-performing month. In all, it added over $4.7 billion through June.

SCHD inflows 2023

The fund has nonetheless underperformed the broader market for three main reasons. First, as I wrote here, it has several regional banks in its portfolio. These banks are still under pressure following the collapse of companies like Signature and First Republic.

Second, the company has little exposure to technology companies that have benefited from trends like artificial intelligence. Tech companies represent about 12.35% of its portfolio, with the biggest sectors being industrials, healthcare, financials, and consumer defensive. The only tech companies in the top-ten are slow growers like Broadcom and Cisco.

Third, SCHD ETF has underperformed because of the rising interest rates and bond yields in the US. The yield on the 10-year has jumped to 4.06% while the 2-year has moved to 5%. These yields are higher than SCHD’s 3.65%.

Therefore, it means that investors can earn a better ‘risk-free’ yield investing in government bonds compared to the Schwab US Dividend Equity ETF. 

Despite this, investors have been buying the fund this year, as evidenced by the level of inflows. This performance is because of SCHD’s long track record of beating traditional funds. Also, a fund like this tends to see little outflows because of the capital gains taxes that investors are forced to pay.

Is SCHD ETF a good investment today?

SCHD vs QQQ vs SPY

SCHD has an average track record among investors. $10,000 invested in the fund ten years ago is now worth about $29,123. A similar amount invested in the popular SPDR S&P 500 ETF would be worth $31,801. Also, a similar investment in Invesco QQQ would be worth over $53,790. 

While past performance is not a good indicator of the future, I believe that owning funds with an exposure to technology companies is a better way to invest. Therefore, I recommend allocating more funds to funds like QQQ, QQQM, and SPY.

For SCHD, I believe that its biggest companies in the fund will see slow earnings growth in the near future. Its biggest constituents are Broadcom, UPS, Cisco, Verizon, PepsiCo, Texas Instruments, Home Depot, Merck, Abbvie, and Coca-Cola.

While these are good companies, their revenue and earnings growth remain significantly slower than companies like Apple and Microsoft. 

Therefore, my rating of SCHD is hold. Existing investors should continue holding it to avoid a huge capital gains tax. They should then continue investing in other vanilla funds like SPY and QQQ and covered funds like JEPI and JEPQ.