3 Great ETFs Having a Bad Year

A great track record doesn’t always guarantee great performance. As we’ve learned from George Clooney’s stint as Batman or Clayton Kershaw’s early postseason outings, even the best can occasionally stumble.

ETFs are no different. An unfavorable market environment or stretch of bad luck can wreak havoc on even the best-designed investment strategies. The first half of 2023 was kinder to just about everyone than 2022 was, but a handful of excellent ETFs have failed to measure up to their lofty standards so far.

Schwab US Dividend Equity ETF SCHD

Few have slumped as hard as Schwab US Dividend Equity ETF, ticker SCHD. This Gold-rated strategy ranked within the top 1% of all large-value funds over the decade leading into 2023. But from the start of the year through June 19, it trailed 96% of its category peers.

SCHD sweeps in 100 companies that have paid dividends for at least 10 straight years and boast the financial health to extend that streak. It mines the higher-yielding half of the market and focuses on firms’ fundamentals, striking an attractive balance between value and quality. It also taps into the market’s expertise with market-cap weighting and reduces concentration with a set of constraints. The thoughtful approach has bred tremendous performance since SCHD’s 2011 inception.

That is, until 2023. Its demanding requirements filtered out firms like Meta Platforms META and Alphabet GOOGL, which powered other large-value funds and the Russell 1000 Value Index. A heavy stake in regional banks cramped the fund toward the end of the first quarter. While the fund’s lean 100-stock portfolio may suffer these occasional setbacks, its careful stock selection and risk management measures should render them few and far between.

iShares S&P Small-Cap 600 Growth ETF IJT

iShares S&P Small-Cap 600 Growth ETF, ticker IJT, earns a Bronze Morningstar Medalist Rating because it’s cheap, high-quality, and reasonably well-diversified. Those traits have not translated into recent success, however. Its 5.9% year-to-date gain trailed 90% of small-growth strategies and lagged the Russell 2000 Growth Index by about 6.5 percentage points. Due to S&P index’s probability screens and definition of small cap, this fund favors smaller, cheaper stocks than most of its peers. In a 2023 market that has favored larger, faster-growing companies, that has pushed it to the back of the small-growth cohort.

The fund still offers a range of benefits that should reward patient investors. By weeding out unprofitable stocks, it reduces volatility and tilts toward the quality factor. Market-cap weighting has more pros than cons, and concentration is not a concern here. IJT’s strong long-term track record is more telling than its recent woes.

SPDR Portfolio Intermediate Term Corporate Bond ETF SPIB

The last fund for today is Bronze-rated SPDR Portfolio Intermediate Term Corporate Bond ETF, ticked SPIB. This index strategy targets U.S. investment-grade corporate bonds with between one and 10 years until maturity. The bonds it absorbs are weighted by market value, which normally favors the firms with the most resources to service their debt. Market-value weighting also promotes diversification, as the fund tallies thousands of holdings and allocates only a fraction of the portfolio to the largest few.

Despite these solid attributes, the fund trailed 86% of its peers from the start of the year through June 19. Its four-year duration is about three years shorter than the average corporate bond fund—a bad recipe in a year that has rewarded funds that take a little more interest-rate risk. That said, SPIB’s short duration landed it among the top 2% of its peers in a challenging 2022. The optimal duration will change from year to year, but market-value weighting, sound diversification, and a low fee make this fund a solid choice either way.

Watch “‘Huge’ Rebalancing at Momentum ETF Provides Market-Beating Clues” for more from Ryan Jackson.