The blue-chip Schwab US Dividend Equity ETF (SCHD) has had a tough year as investors dumped value stocks for high-flying technology companies like Nvidia, Palantir, and Micron.
The SCHD ETF has had a total return of just 4.68%, while the S&P 500 and Nasdaq 100 indices have jumped by 22% and 17%, respectively. This article explores why the SCHD ETF has disappointed this year and why the SPYI is a better fund.
Why the SCHD ETF has disappointed
While the SCHD is a beloved ETF, its performance in the past few years has not been good. Its three-year return was just 20%, while the Nasdaq 100 and S&P 500 have returned 120% and 78%, respectively.
This performance has coincided with the emergence of the AI industry and the surging investments. It has transformed the American investing landscape by creating several companies valued at over $1 trillion.
Nvidia recently crossed the $5 trillion level, while Google is now approaching the $4 trillion level. Other companies like Palantir, Amazon, and Microsoft have all thrived in this period.
In contrast, the SCHD ETF is mostly made up of companies in traditional industries. Energy is the biggest constituent, accounting for ~20% of holdings, which is notable as crude oil and natural gas have pulled back. Oil has dropped because we are in the era of abundance.
Consumer staples, healthcare, and industrials are also big names in the SCHD ETF. Some of these companies have been impacted negatively by Donald Trump’s tariffs.
The top companies in the SCHD ETF are top names like Merck, Amgen, Cisco, AbbVie, Coca-Cola, and Pepsi. All these are blue-chip names that have a record of paying dividends. However, their performance cannot match the performance of big tech names.
SPYI ETF is a better buy
For investors interested in dividends, the 3.77% yield that the SCHD ETF offers is not enough. Besides, investing in the low-risk government bonds offers a higher return.
Therefore, one of the top alternatives to consider is the NEOS S&P 500 High Income ETF (SPYI). SPYI is more expensive than SCHD thanks to its 0.68% expense ratio.
However, history shows that it has a better performance than the SCHD over time. Its three-year return is 58% compared to SCHD’s 20%.
The same divergence happened this year as the SCHD returned 4.98% compared to SPYI’s 15%. This performance is partially because SPYI has a dividend yield of 12%, which helps to compensate its high cost.
SPYI uses the covered call approach by first investing in the S&P 500 Index companies like Nvidia, Apple, Microsoft, and Alphabet. It then writes call options on the index, which gives its a monthly premium, which it uses to fund its dividend.
The fund also uses other approaches to boost its returns. Most notably, it uses the tax loss harvesting approach, in which it uses losses in some investments to offset taxable gains. This approach explains why the SPYI ETF often beats other covered call ETFs like JEPI.
Ideally, the best ETFs to invest in are generic names like VOO and QQQ. These are all low-cost funds that have a long record of doing well. However, if you are interested in a boomer candy fund, SPYI is one of the most recommended among analysts.
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