SCHD ETF’s 0% Return Amid Market Rally Sparks Concern

The Schwab US Dividend Equity ETF (SCHD), with nearly $70 billion in assets under management, stands as one of the world’s largest and most popular ETFs. Traditionally favored by income seekers, retirees, and conservative investors, SCHD currently pays a substantial 3.9% yield—significantly higher than the 1.25% offered by S&P 500 tracking ETFs like VOO and SPY. However, this income advantage has come at a steep cost during the current bull market. While the S&P 500 has reached all-time highs with 14% year-to-date returns and the Nasdaq has surged 18%, SCHD has delivered precisely 0.0% returns year-to-date, creating what many investors view as a high-yielding disappointment.

The underperformance extends beyond just recent months. Over the last five years, SCHD has gained only 39% compared to the S&P 500’s impressive 93% surge. This stark contrast raises fundamental questions about whether the ETF’s dividend income adequately compensates investors for its poor capital appreciation. The divergence in performance has become particularly pronounced as markets continue their upward trajectory, leaving SCHD investors watching from the sidelines while broader indices achieve record-breaking gains.

SCHD’s underperformance stems directly from its structural design and rebalancing mechanics. The ETF operates under a strict rule that no single stock can exceed 4% of the index’s total weight. This constraint creates a significant performance headwind during market rallies. Currently, the fund’s top four holdings—AbbVie (+31% YTD), Lockheed Martin (+5.2% YTD), ConocoPhillips (-3.97% YTD), and Cisco Systems (+16.5% YTD)—have all performed reasonably well individually, with most posting double-digit gains. However, because these successful positions now exceed the 4% threshold, they must be trimmed during the upcoming rebalancing.

This systematic selling of winners fundamentally limits the ETF’s ability to maintain exposure to its best-performing stocks. The rebalancing mechanism effectively forces the fund to reduce positions in companies that are driving returns, creating a performance drag that compounds over time. While this structure provides diversification benefits, it comes at the expense of capital appreciation during strong market periods. The result is an ETF that systematically cuts its winners while maintaining exposure to underperformers, creating a structural disadvantage in bull markets.

Compounding the structural issues, SCHD maintains significant positions in several chronic underperformers that have substantially dragged on returns. Target has plummeted 35% year-to-date, United Parcel Services (UPS) has declined 31%, and PepsiCo has fallen 6.3%. These substantial losses have offset gains from better-performing holdings, contributing significantly to the ETF’s flat performance. The concentration in these struggling companies highlights the challenges of maintaining a dividend-focused strategy in a market environment where growth stocks are leading the advance.

The combination of forced selling of winners and retention of losers creates a perfect storm for underperformance. While SCHD’s 3.9% yield appears attractive on the surface, the capital depreciation from holdings like Target and UPS has effectively negated the income benefits for investors seeking total returns. This dynamic becomes particularly problematic during periods of market strength, where the opportunity cost of missing broader market gains far exceeds the income generated by the dividend yield.

For income-focused investors, SCHD’s recent performance raises fundamental questions about dividend ETF strategies in evolving market conditions. The ETF’s structural limitations appear particularly ill-suited for the current market environment, where concentration in successful mega-cap stocks has driven much of the S&P 500’s and Nasdaq’s impressive gains. The 4% position limit prevents SCHD from benefiting meaningfully from these market leaders, while its dividend focus keeps it anchored to companies facing significant headwinds.

The analysis suggests that SCHD’s chronic underperformance and structural constraints may dramatically outweigh the value of the income it provides. While the 3.9% yield remains attractive for pure income generation, investors must weigh this against substantial opportunity costs during market rallies. As broader indices continue reaching new highs, the case for SCHD becomes increasingly difficult to justify for investors seeking both income and capital appreciation. The ETF’s disappointing milestone of 0% returns during a rip-roaring market serves as a cautionary tale about the hidden costs of structural constraints in popular investment vehicles.