Why Has SCHD Performed So Poorly Lately?

When you look up “disappointing ETF” in the dictionary, you’re treated to a picture of SCHD.

At least I assume so. Because who even owns a dictionary anymore?

Despite many folks on various platforms loving the most famous of North America’s dividend ETFs as a long-term investment, the fact is short-term results just haven’t been there. From January 1st through October 31st, SCHD is barely positive — and that’s only if you include dividends.

Compare that to the S&P 500, and it’s a pretty sad result.

Rather than just throwing stones and bashing SCHD like so many other people have done, I decided to take a closer look. I want to know why the ETF has underperformed, and once I figure out that reason, I can then try to determine if it’s some sort of permanent issue or whether it’s something that will eventually reverse itself.

Let’s dive deeper into SCHD but first, a quick primer on why I don’t own any in my own portfolio.

The fatal flaw

I often get asked why I don’t have some (or all) of my portfolio in the Schwab US Equity ETF (NYSE:SCHD).

After all, SCHD checks off a lot of the boxes I’m looking for. It focuses on companies with strong returns on equity combined with good balance sheets. It favours low payout ratios versus high ones. And the portfolio is in the position to deliver solid dividend growth, plus a solid current yield. Us here at Canadian Dividend Investing (me and my cat) tend to like that combination. That, and treats.

Here’s a look at the top 10 holdings. There’s just one tech name, with the rest of the top 10 rounded out by companies in the pharma, consumer staple, and energy sectors. And even the tech name is a more mature, stodgy technology name. Nobody is accusing Cisco of revolutionizing much of anything.

While I’m definitely a fan of the boring nature of the portfolio, SCHD has one fatal flaw that ensures I don’t buy any shares.

The problem is it boots out winners way too early. Positions in good companies are sold when shares are still trading at reasonable prices because they no longer meet the ETF’s selection criteria. I don’t want that in my portfolio, so I’m not a fan of SCHD.

One example is Microsoft. In 2014, SCHD had a healthy position in Microsoft. MSFT had growth potential, was trading at a reasonable valuation, and had solid financial metrics. It also paid what looked to be a growing dividend. Remember, Microsoft didn’t have that much dividend history back then.

SCHD held onto its Microsoft position for a few years, but dropped it in 2018.

Needless to say, this was not a good move. The fund sold way too early.

Instead of investing in SCHD itself, I use both it and its international cousin — which trades under the ticker SCHY — as idea generation tools. I look at the stocks owned by these ETFs and consider buying them for my own portfolio. They’re excellent hunting grounds because the ETF selection process looks at the same sort of qualifications I’m looking for.

In fact, one of the stocks I’ve been buying for my portfolio lately was sourced from SCHY.

The other reason why I don’t own SCHD is my portfolio is mostly in Canadian dividend stocks. I do this for a few different reasons, but the one we’ll focus on right now is taxes. If most of your income comes from dividends paid by Canadian corporations, chances are it’s taxed pretty well.

In fact, my buddy Jim used that plan to pay absolutely nothing in taxes in 2022. And even when he does have to pay taxes — like he did in 2023 — the impact isn’t so bad.

Now that we’ve covered why I’m not such an SCHD fan for my portfolio, let’s dig a little deeper into what’s ailing the ETF.

The big issue with SCHD

As mentioned, SCHD shares are only positive this year because they pay such a generous dividend. If we took away that payout, the stock would be down about 2% so far in 2025.

(Note: I wrote this a few days ago, so numbers are current as of November 3rd)

To figure out what’s going on, I decided to break down the fund into sectors. We’ll focus on the top five, since they combine to account for 75% of the fund’s assets.

I immediately see a problem. Energy is the top sector at 19.4% of total assets, and the performance of the average energy stock has been abysmal in 2025. The price of oil is down, with a barrel of the good stuff changing hands for less than US$60 recently. Just a few years ago, oil topped $120 per barrel.

Going back to our top-10 holdings, we see that both Chevron (NYSE:CVX) and Conocophillips (NYSE:COP) combine to make up about 8% of the portfolio. SCHD also holds the following energy names:

• EOG Resources (2.38% of the portfolio)

• SLB (formerly Slumberger, 2.22% of the portfolio)

• Valero Energy (2.17% of the portfolio)

• ONEOK (1.74% of the portfolio)

• Halliburton (0.94% of the portfolio)

• Coterra Energy (0.74% of the portfolio)

I did the work so you don’t have to. The best performance came from Valero, it’s up 37.7% (plus dividends) so far this year. Chevron is also 7.5% higher so far this year. The rest are all lower YTD, with ONEOK really impacting the overall result. The natural gas midstream company is down more than 34% YTD.

On average, excluding dividends, the oil part of SCHD is down about 5% so far this year. So that has weighed down total returns.

The next biggest sector in the fund is consumer staples, and it turns out that sector has underperformed as well.

More weakness

18.5% of SCHD’s assets are invested in consumer staple stocks, names that have delivered solid growth and ever-higher dividends for years now. For most of the last few decades these have been consistent wealth-building stocks that have been at the bedrock of many successful portfolios.

But more recently, these names have underperformed. Oh, have they ever.

First, let’s take a closer look at the consumer staple names in SCHD and their YTD results. Here’s how the consumer staple part of the portfolio looks today:

• Coca-Cola (4.1% position)

• Pepsico (4.04% position)

• Altria (3.47% position)

• Target (1.74% position)

• Kimberly Clark (1.64% position)

• Hershey (1.04% position)

• General Mills (1.03% position)

You can probably guess where I’m going with this. Coca-Cola shares are up 11% on a YTD basis, and that’s before the positive impact of the dividend. Altria shares were having a nice year until disappointing earnings; now the stock is up just 7.4% on a YTD basis.

The rest of the sector? Pfffffffffffft. Target shares are down more than 30% so far this year. Kimberly Clark shares were annihilated this week after the company offered to use its stock to help pay for a potential Kenvue acquisition. And General Mills is down more than 25% thus far in 2025.

My rough math indicates that the weakness in the consumer staple category has contributed more to SCHD’s issues than the energy sector. Put the two together and almost 40% of the portfolio is in sectors that have significantly underperformed the S&P 500.

And then, if that’s not enough, an additional 16% of SCHD is invested in health care — another sector that has underperformed compared to the S&P 500. We won’t get too deep into that because, frankly, it just doesn’t matter that much. It’s hard to put up even solid gains when close to 40% of your portfolio is severely underperforming.

How about the S&P 500?

I don’t want to get too far into the weeds here, but I’ll just quickly mention the largest part of the S&P 500.

The largest seven stocks in the S&P 500 (the so-called Mag 7) make up approximately 37% of the S&P 500. This is an apt comparison because the two laggard sectors in SCHD account for about 37% of its assets, too. So we can compare similar weightings to similar weightings. It’s a nice apples-to-apples comparison.

You can probably already figure out the punchline here. The Mag 7 are up approximately 30% YTD, while the equivalent weighting of SCHD is pretty much flat. These seven stocks — plus a few others — have driven the S&P 500’s returns so far in 2025.

That evidence is confirmed when we compare the performance of the S&P 500 versus an equal-weighted S&P 500 fund. It’s the Mag 7 and other sexy tech names that are driving returns. If we take that influence out, the median stock is doing much worse.

You can also see that the S&P 500’s annual performance really started to rocket ahead of its equal-weighted version in the summer — which is right around when the S&P 500 really started to take its lead over SCHD, too.

The bottom line

Now that we’ve crunched the numbers, a conclusion emerges.

The problem isn’t with SCHD. In fact, SCHD is performing pretty much in line with the S&P 493. The problem is that SCHD doesn’t hold any Mag 7 stocks.

When we look back at SCHD’s more long-term underperformance versus the S&P 500, the same pattern emerges. The benchmark U.S. stock index has been driven by technology for years now. Anything that wasn’t overweight U.S. tech has underperformed.

Therefore, the conclusion here is pretty simple. SCHD has underperformed because it lacks exposure to the largest tech stocks that have been driving total returns. This is a thesis that’ll work until it doesn’t, and at that point investors will likely look to more boring assets like SCHD to hide out in until they find another bull market somewhere else.

I’m convinced stodgy investments like SCHD will have their day in the sun again, but it’s certainly possible shares underperform in the meantime. If your goals involve dividend growth, then this isn’t such a big deal. So stay the course and perhaps look at doing what I do, and use SCHD as an idea generation tool. That way you can hold long-term winners for decades, rather than just a year or two.