3 Great ETFs Having a Lousy 2023

Daniel Sotiroff: After a brief hiatus, large technology stocks returned with gusto in 2023. The “Magnificent Seven”—seven large technology stocks that include the likes of Apple, Meta Platforms, and Nvidia, have been behind the market’s strong performance this year. That also means a lot of excellent ETFs without meaningful stakes in those seven names ended up having a lousy year.

3 ETFs Having a Lousy 2023

1. Schwab U.S. Dividend Equity ETF SCHD
2. Vanguard High Dividend Yield ETF VYM
3. iShares MSCI USA Min Vol Factor ETF USMV

Gold-rated Schwab U.S. Dividend Equity ETF, ticker SCHD, is one such ETF that’s turned in a subpar year. Its negative 1.6% return over the first 11 months of 2023 left a lot to be desired when the broader U.S. market was up almost 20% over the same period.

The reason why isn’t too hard to understand. SCHD follows a strict process that looks for stocks with higher-than-average dividend yields and those that consistently grow their dividend payments over time—not exactly the traits that define the Magnificent Seven. Instead, stocks trading at lower than average, yet reasonable multiples anchor SCHD’s portfolio.

Gold-rated Vanguard High Dividend Yield ETF, ticker VYM, performed slightly better than SCHD, but only slightly. Its total return over the first 11 months of 2023 stood at just 0.91%.

VYM fell behind for the same reason as SCHD. Its portfolio is a diverse collection stocks with higher-than-average yields and lower-than-average price multiples. In other words, it had little, if any, exposure to the large tech stocks that were leading 2023′s rally.

One year of lacking performance isn’t the end of the road for these two. The road to long-term success is often littered with bumps and potholes, so investors shouldn’t give up on either one. Morningstar’s analysts have so much confidence in their long-term potential that they upgraded the Process Pillars on SCHD and VYM to High from Above Average and their Morningstar Medalists Ratings to Gold from Silver earlier this year. The expense ratios on both ETFs are among the lowest in the large-value category, and they remain great choices for long-term investors that can tolerate their ups and downs.

Outside of value ETFs, Silver-rated iShares MSCI USA Min Vol Factor ETF, which trades under the ticker USMV, is another ETF that languished in 2023, though its 7.3% return looks considerably better than SCHD or VYM.

USMV’s lackluster showing actually confirms Morningstar’s expectations. It intentionally takes risk off the table, meaning it’s less sensitive to the market’s ups and downs. It’s expected to lag behind during strong rallies like the one we had this year. On the other hand, it tends to hold up well when the market stumbles.

Watch “3 Growth ETFs Having a Great Year” for more from Daniel Sotiroff.