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ETF Specialist

This Low-Cost, High-Quality Dividend ETF Earns High Marks

Schwab U.S. Dividend Equity ETF is one of our favorite equity-income funds.

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 Schwab U.S. Dividend Equity ETF (SCHD) is a passively managed exchange-traded fund that homes in on high-quality income-producing stocks. The fund's index is composed of large, liquid companies with above-average dividend yields that have paid dividends in each of the past 10 years. It also requires constituents to earn high marks on four fundamental metrics: cash flow/debt, return on equity, dividend yield, and dividend growth. The result is a relatively concentrated, high-quality portfolio that is loaded with stocks possessing wide Morningstar Research Services Economic Moat Ratings, like  Procter & Gamble (PG) and  Coca-Cola (KO). Also, SCHD charges a 0.07% expense ratio, a fraction of the 0.90% median fee taken by its peers in the large-value Morningstar Category. A sensibly constructed benchmark that marries value and quality and a low fee underpin our Morningstar Analyst Rating of Silver.

Since its inception in October 2011, SCHD has managed to keep pace with its average peer in the large-value category. The fund's middling performance over this span can be largely attributed to the fact that high-quality stocks have lagged both the broader market as well as higher-beta, lesser-quality firms. So this is exactly the pattern of performance one would expect from this fund in light of prevailing market conditions. One can also expect that this fund will earn its keep in market downturns. Although SCHD's index has back-tested data dating to Dec. 31, 1998, its live calculation began in August 2011. Back-tested data show that the benchmark's maximum drawdown during the 2008-09 bear market was 44.5%. This compares with the S&P 500's 51.0% drawdown and the Russell 1000 Value Index's 56.3%. While this is a good indication of how this fund may have performed in the crisis period, investors should view back-tested data with a healthy dose of skepticism.

Ben Johnson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.