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The Schwab U.S. Dividend Equity ETF (SCHD) has been and still is among the most popular dividend ETFs in the world. Its stellar track record since its launch in 2011 has helped grow it into a $68 billion behemoth.

The past couple years, however, have been unquestionably rough. After 9 straight years of landing in the top 1/3 of Morningstar’s Large Value category, it’s plummeted to the bottom of the ratings. In 2023, it fell into the bottom 11%. In 2024, it improved slightly, but still landed in the bottom 1/4. The early returns for this year have been terrible again as 90% of funds in its category have outperformed it.

That’s caused its overall Morningstar rating to slip from 5★ to 4★.

It hasn’t caused investors to shy away though. Billions of net new money continues to flow in. Short-term underperformance tends to see net flows turn negative and AUM shrink. The ARK Innovation ETF (ARKK) is a prime example of this. SCHD, however, has been impervious to this so far.

The two biggest questions for SCHD right now are 1) what’s caused it to underperform so badly, even within its category and 2) will those trends continue into 2025.

How Does SCHD Work?

SCHD tracks the performance of the Dow Jones U.S. Dividend 100 Index, which is designed to measure the performance of high dividend yielding stocks issued by U.S. companies that have a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios.

All index eligible stocks must have sustained at least 10 consecutive years of dividend payments, have a minimum market cap of $500 million and meet minimum liquidity criteria.

The index components are then selected by evaluating the highest dividend yielding stocks based on four fundamentals-based characteristics — cash flow to total debt, return on equity, dividend yield and 5-year dividend growth rate.

That creates a portfolio that looks sort of similar to a standard large-cap value ETF, but with a quality and conservative investment tilt.

SCHD demonstrates no small-cap tilt (SMB), which isn’t surprising given its objective. It has a fairly strong value lean (HML) compared to the S&P 500, but it’s not nearly as strong as that of the S&P 500 value group. It leans pretty hard into higher quality companies with robust profitability (RMW) and those that demonstrate conservative investment characteristics (CMA).

SCHD: Yield & Top Holdings

One of the biggest draws of SCHD is its yield. In a world where the S&P 500 is only paying around 1.2% currently, tripling that to 3.6% while remaining exposed to a long history of above average total returns is really appealing.

But when you focus on things, such as cash flows and return on equity, you don’t necessarily get the most exciting portfolio in the world. While the magnificent 7 stocks continue to dominate the news cycle, investing in Bristol Myers Squibb and Lockheed Martin isn’t going to put butts in the seats, so to speak.

That’s why SCHD has struggled so mightily against the S&P 500 in recent years. After outperforming the index by 15% in 2022 during the big stock/bond bear market, investors have cared about mega-cap growth/tech and almost nothing else. They’ve seen triple digits returns in some of the magnificent 7 names and have seen no need to diversify their portfolios when most of the market’s gains are coming from just a handful of stocks.

Currently, its top sector holdings are financials, healthcare and consumer staples. Five sectors have allocations of at least 10%, but none has more than 20%, suggesting that the portfolio overall is well-diversified. Tech only comes in at #7 with an 8% allocation.

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SCHD: Outlook For 2025

Tech dominance explains the underperformance relative to the S&P 500, but why has it been lagging the S&P 500 value index? Even if it’s lagging the broader market, it can still outperform within its peer group.

Digging into the composition of the fund, I think we find that the same sector allocation, which helps diversify away some unnecessary risk, comes with drawbacks. Specifically, SCHD is underweight to the Large Value category by a staggering 15%! On top of that, healthcare and staples, two of the fund’s top three sector holdings, have been and continue to be among the market’s worst performers. SCHD’s biggest overweight is energy, another sector that has underperformed lately (although it’s gotten off to a good start in 2025).

In other words, SCHD has been invested in all the wrong places. It’s been ill-positioned for what’s been working. It’s been underweight to the biggest winners. It’s been overweight to the biggest losers. Its heavy tilt to the quality factor helped in 2024, but its other exposures didn’t.

As of right now, we don’t have much indication that SCHD’s defensive sector overweights are going to help anytime soon. Cyclicals, including financials and energy, have gotten a boost in anticipation of more favorable Trump administration policies, especially the push towards deregulation. I see SCHD’s cyclical exposures continuing to deliver some alpha in 2025, but will it be enough?

I’ve spent a lot of time lately looking at 3-month charts. It’s a much shorter time frame than I typically look at, but it’s important today due to what’s happened during that time frame:

• Pre-election market

• Post-election market

• Fed pause

• Post-inauguration policy implementation

In essence, this tells us what the market thinks about a fund’s prospects in the new Trump presidency as well as how it might be positioned for an environment that figures to see very few rate cuts.

Early indications aren’t very promising.

SCHD has lagged the S&P 500 by nearly 6% over this period, although it has outperformed large-cap value stocks by a slight margin.

This means that the market is still bullish on risk assets and continues to lean in a growth direction. Tech hasn’t been in favor quite as strongly as it has been over the past couple years, but a healthy economy and the emergence of AI are likely to remain the catalysts that prevent a significant pullback.

If we look purely at a sector level over the past three months, the news isn’t any better. The best performers have been consumer discretionary and communication services - two growth areas of the market and two sectors that SCHD is underweight. Financials are #3 and SCHD should, in theory, be favorably positioned for that, but then there’s tech at #4.

It’s been a growth world over the past two years and it still looks like a growth world now.

That means SCHD might need something to break in the economy in order for defensive, value and dividend strategies to outperform again. In other words, something resembling a repeat of 2022.

The possibilities are certainly there. Credit conditions are getting worse all the time and inflation looks like it’s picking up again. U.S. stocks have regularly reacted positively to the idea of monetary accommodation and lower rates. The opposite of that - no rate cuts or maybe even a rate hike - should have a negative effect, which would likely make SCHD outperform, if not produce positive returns.

My final verdict is that I’m not really seeing an environment conducive to an SCHD rebound. Investors are still favoring mega-caps growth and that’s the area where SCHD is badly underexposed. If the economy remains in a healthy place and the AI narrative still has a hold over the markets, it’s tough to find an opening for SCHD to lead.

On the flip side, a lot can happen in the next 12 months. Trump policies are likely to be significantly different from Biden’s and that could add a lot of volatility to the markets. Not to mention that a broad tariff policy could quickly stifle growth and increase inflation.

SCHD will have its moment in the sun again. It just might not come in 2025.