Is the SCHG a good complement to the SCHD ETF?

The Schwab US Large-Growth ETF (SCHG) continued its remarkable rally this week as it jumped to its highest level on record. It has jumped by over 82% from its lowest point in 2022, helped by the strong performance of big-cap technology companies.

What are the SCHG and SCHD ETFs?

The Schwab US Large-Growth ETF is a leading ETF that invests in the biggest growth companies in the United States. Some of its biggest companies in the index are the likes of Microsoft, Apple, Nvidia, Amazon, and Alphabet.

Its goal is to invest in companies that have strong balance sheets and those that are generating strong revenue and earnings growth. It is made up of 250 companies, over $28 billion in assets, and an expense ratio of 0.04%.

46% of its companies are in information technology followed by communication services, consumer discretionary, and health care. 

The Schwab US Dividend Equity (SCHD), on the other hand, is a giant fund with over $60 billion in assets. It tracks the Dow Jones US Dividend 100 Index, which tracks companies that have a track record of generating strong dividend growth.

Its biggest constituent companies are firms like Texas Instrument, Amgen, Pfizer, PepsiCo, and Lockheed Martin. Most of these firms have a wide moat in their industries and huge cash buffers in their balance sheet. 

According to its website, most companies in the ETF are in the financials industry followed by healthcare, consumer staples, industrials, and energy. 

As such, SCHD and SCHG have significantly different types of companies because of their different goals. SCHG’s goal is to generate returns to its holders while SCHD’s goal is to provide regular dividend growth to its investors.

Do they complement each other?

SCHD and SCHG have had strong performance over the years, helped by the broader trends in US equities. The SCHD ETF’s total return in the past five years stood at 78% while SCHG had 145.9%. 

This trend has continued recently, with the SCHG ETF rising by 40% while the SCHD has jumped by 14.8%. The divergence happened because most of the price gains in the past decades were driven by the technology sector. All companies with a market cap of over $1 trillion are in the tech industry.

SCHG vs SCHD ETFs five-year performance

Therefore, as I have written before, I believe that investing in SCHD alone is risky and does not lead to strong gains. Its biggest challenge is that it has a minimal exposure to the forward-looking technology sector.

Therefore, it is always good to find ETFs that have a growth element. SCHG is a cheaper alternative to this. It also often beats the tech-heavy Nasdaq 100 ETF (QQQ) and the S&P 500 (SPY) ETF. For example, its total return in the past three years was 42.4% while the other two generated 40% and 32%, respectively.

As such, if you are investing in the Schwab Dividend Equity ETF, it makes sense to also invest either in SCHG or the other related ETFs like QQQ and Invesco Large Cap Growth ETF (PWB).