SCHD + SCHG + BITO: ETF combination to SWAN

The Schwab US Dividend Equity (SCHD) stock has staged a strong comeback in the past few weeks. After bottoming at $66 in October, the fund has jumped to $73, its highest point since September 20th.

Lessons from the recent crash

SCHD is an ETF that is beloved by most dividend-focused investors. They love it for a good reason. For one, it has a reasonable dividend yield of over 3.5% and a low expense ratio of just 0.06%. And most importantly, the fund has a strong track record of dividend growth. 

According to SeekingAlpha, SCHD has increased its dividends in the past 11 years. Its five-year dividend CAGR rate stands at 13.70%, beating other growth-focused funds like iShares Core Dividend Growth ETF (DRO) and iShares Core High Dividend ETF (HDV).

The SCHD ETF is so successful such that $10,000 invested in the fund in September 2013 is now worth over $27,650. A similar amount invested in the benchmark SPDR S&P 500 ETF (SPY) would be worth $30,172. 

As regular readers know, I believe that the best way to Sleep Well at Night (SWAN) is to invest in quality ETFs like SPY and QQQ. These funds are relatively simple to understand and are not leveraged. They also have a long track record of rewarding investors. 

While the SCHD ETF is a good fund to invest in, the past few months have taught investors a good lesson in diversification. The fund’s stock is down by more than 5% from its highest point in 2022. 

Therefore, I believe that income investors should pair it with other ETFs that have unique characteristics. Two of the best funds to pair with it are QQQ and SPY, which track the biggest companies in the United States. The other two to consider are SCHG and BITO.

The case for SCHG ETF

The Schwab US Large Growth ETF (SCHG) is a giant fund with over $21 billion in assets and a cheap expense ratio of just 0.04%. It tracks 253 companies mostly in the technology industry. The biggest ones are firms like Apple, Microsoft, Amazon, Nvidia, and Alphabet. 

The benefit of investing in this fund is that it gives an investor access to the top companies in the US at a cheaper ratio. Its expense ratio is cheaper than that of Invesco QQQ, which stands at 0.20%. In the long term, these expenses can add up. SCHG has a similar return to QQQ.

A key reason why the SCHD ETF has not done well over the years is that it has a limited technology exposure. Tech accounts for just 11% of the total fund, with the biggest constituents being industrials, financials, and health care.

Therefore, adding SCHG in a SCHD portfolio gives you access to a growing sector that has a long record of growing. As such, in addition to SCHD’s dividend returns, SCHG will provide equity growth appreciation.

The case for BITO ETF

SCHG vs SCHD vs BITO total returns

The other ETF to pair with SCHD is the ProShares Bitcoin Strategy ETF (BITO), which is the only Bitcoin-focused fund in the market today. While this fund tracks Bitcoin futures contracts, it tracks the overall Bitcoin performance.

I believe that Bitcoin has proven to be a good investment in the past decade. In this period, it has gone through testing by fire. Global regulators, including those in China, have ganged against it and failed. Most recently, the SEC sued companies like Binance, Coinbase, and Kraken. 

Bitcoin has survived several black swan events like the collapse of Mt. Gox, FTX, Celsius, Three Arrows Capital, Terra, and Voyager Digital. In all these collapses, the consensus was that Bitcoin would not survive.

Most importantly, Bitcoin has survived a high-interest rate environment. The Fed hiked rates from 0% in 2022 to a two-decade high of 5.5%. In the past, the view was that the coin would not survive higher rates as investors shifted to safe assets like short-term bonds. 

The challenge for BITO is its high expense ratio of 0.95%. This explains why the recent spot Bitcoin ETF applications by companies like Blackrock and Invesco are so important.

Therefore, a combination of SCHD, SCHG, and BITO will provide both regular income and long-term growth.