Why SCHD Stock May Lag Behind SPY

Investing in ETFs requires careful consideration of sector exposure, performance metrics, and broader economic trends. The Schwab U.S. Dividend Equity ETF (SCHD) has long been a favorite for income-focused investors due to its high dividend yield and low expense ratio. However, when compared to the SPDR S&P 500 ETF Trust (SPY), SCHD may face challenges in delivering comparable returns. This article explores key factors behind SCHD's potential underperformance and evaluates its prospects in the current market environment.

Understanding SCHD's Sector Allocation

The Schwab U.S. Dividend Equity ETF (SCHD) is a popular choice among investors seeking dividend income. However, its performance may lag behind the SPDR S&P 500 ETF Trust (SPY) due to several factors. SCHD has a significant underweight in technology stocks and an overexposure to the financial sector, particularly banks.

As of December 2024, SCHD's top holdings include Cisco Systems Inc. (CSCO), Bristol-Myers Squibb Company (BMY), and The Home Depot, Inc. (HD). Financial services comprise approximately 20.13% of its portfolio.

The Impact of Interest Rates on SCHD Stock

A dovish interest rate outlook tends to benefit long-duration tech growth stocks, which are more heavily represented in SPY. Conversely, banks, which constitute a larger portion of SCHD's holdings, may face headwinds due to higher deposit costs impacting their net interest margins. This difference in sector sensitivity to macroeconomic trends further explains why SCHD may struggle to outperform SPY.

Valuation and Performance Metrics of SCHD

The valuation discount of SCHD relative to SPY has narrowed significantly, from 40.5% to 16.5%, making SCHD less attractive on a valuation basis compared to earlier periods.

In terms of performance, SCHD’s year-to-date total return as of December 13, 2024, stands at 15.27%, while SPY has delivered a higher return of 21.36% over the same period. As of December 2024, the SCHD stock price is approximately $79.50. This widening performance gap highlights the challenges faced by SCHD in matching SPY’s growth potential.

Dividend Yield Comparison

One of SCHD’s key selling points is its higher dividend yield. As of December 2024, SCHD offers a dividend yield of approximately 3.6%, compared to SPY’s yield of 1.5%. For income-focused investors, this higher yield may offset some of the underperformance in capital appreciation.

Expense Ratio Analysis

SCHD boasts a low expense ratio of 0.06%, which is slightly lower than SPY’s expense ratio of 0.09%. This makes SCHD an appealing option for cost-conscious investors who prioritize minimizing management fees.

Historical Performance Trends

Over the past decade, SCHD has generally provided steady returns with lower volatility compared to SPY. However, its heavy reliance on dividend-paying stocks has sometimes resulted in underperformance during periods of strong growth in the tech sector, where SPY holds a significant advantage.

Macro Trends and Future Prospects

Looking ahead, SCHD’s performance will likely depend on macroeconomic factors such as interest rate policies and the health of the financial sector. If rates stabilize or decline, SCHD’s holdings in financials and high-dividend sectors could see moderate growth. However, a continued rally in tech could further amplify SPY’s dominance.

Exploring Alternative Dividend ETFs

Investors considering SCHD may also want to explore alternative dividend-focused ETFs such as Vanguard Dividend Appreciation ETF (VIG) or iShares Select Dividend ETF (DVY). These options offer different sector weightings and yield profiles, providing additional choices for diversification.

Conclusion: Is SCHD Stock Still a Good Investment?

Given its sector allocations and the current economic environment, SCHD may underperform compared to SPY. However, its high dividend yield and low expense ratio make it a compelling choice for income-oriented investors. To optimize their portfolios, investors should weigh SCHD’s dividend advantages against its potential for lagging overall market growth and consider alternative dividend-focused ETFs for diversification.

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