SCHD ETF’s 0% Returns Highlight Structural Flaws

The Schwab US Dividend Equity ETF’s flat year-to-date performance stands in stark contrast to broader market indices that have been reaching new heights. While the S&P 500, tracked by ETFs like VOO and SPY, has gained 14% year-to-date and just hit an all-time high, and the Nasdaq has surged 18% during the same period, SCHD has returned exactly 0.0%. This performance gap becomes even more concerning when viewed through a longer-term lens. Over the last five years, SCHD has returned only 39%, while the S&P 500 has delivered a remarkable 93% gain, more than doubling the dividend ETF’s performance.

The ETF’s current 3.9% yield, which significantly exceeds the S&P 500’s 1.25% payout, has traditionally been its main attraction for income-seeking investors and retirees. However, this yield advantage appears increasingly insufficient to compensate for the massive growth opportunity cost. The structural issues causing this underperformance are becoming more apparent as market conditions evolve, raising questions about whether the fund’s design is fundamentally flawed in the current investment landscape.

SCHD’s underperformance stems directly from its construction methodology, particularly the rule that no single stock can exceed 4% of the index’s total weight. This constraint creates a systematic headwind during bull markets by forcing the fund to trim its most successful holdings during regular rebalancing. Currently, the ETF’s top four positions—AbbVie, Lockheed Martin, ConocoPhillips, and Cisco Systems—all exceed this 4% threshold and will need to be reduced in the upcoming rebalancing.

This mechanical selling of winners creates a performance drag that compounds over time. AbbVie, for instance, has delivered a 31% return year-to-date, while Cisco Systems has gained 16.5%. Lockheed Martin has returned 5.2%, and even ConocoPhillips, despite being down 3.97%, remains a significant energy holding. By systematically reducing exposure to these outperforming stocks, the ETF’s methodology essentially ensures it cannot fully participate in sustained market rallies, creating what amounts to a built-in performance penalty during bull markets.

Compounding the structural constraints is SCHD’s exposure to several significant underperformers that have dragged down overall returns. Target, one of the fund’s holdings, has plummeted 35% year-to-date, representing a substantial drag on performance. United Parcel Services (UPS) has similarly struggled, declining 31% during the same period. Even consumer staples giant PepsiCo has contributed to the negative performance with a 6.3% decline year-to-date.

This combination of forced selling of winners and retention of underperformers creates a perfect storm for disappointing returns. While the fund’s diversification across 100+ stocks provides some protection against individual company failures, it cannot overcome the systematic limitations imposed by its construction rules. The result is an ETF that, despite its $70 billion in assets and popularity among conservative investors, has consistently failed to keep pace with broader market indices during periods of market strength.

The fundamental question for investors becomes whether the 3.9% yield adequately compensates for both the opportunity cost of missing out on broader market gains and the structural limitations that systematically hamper performance. For many investors, particularly those with longer time horizons, the answer appears increasingly negative as the performance gap continues to widen between SCHD and market-leading indices like the S&P 500 and Nasdaq.