A newer, actively managed dividend fund, the TBG Dividend Focus ETF (TBG), has been delivering stronger performance than the widely popular Schwab US Dividend Equity ETF (SCHD) since its debut in late 2023. This performance difference highlights a growing debate between active and passive investment strategies, especially in a market where rigid, rules-based approaches may face challenges.
While SCHD has long been a cornerstone for dividend growth investors due to its low cost and systematic approach, its recent performance has lagged. In contrast, TBG's flexible, human-led strategy has allowed it to navigate recent market shifts more effectively, raising questions about the limitations of purely algorithmic investing.
Key Takeaways
- The actively managed TBG Dividend Focus ETF has outperformed the passively managed SCHD since launching in late 2023.
- SCHD's rules-based annual reconstitution has recently hurt its performance, particularly its March 2025 portfolio changes.
- TBG employs a flexible strategy managed by human portfolio managers, focusing on 30-40 high-quality dividend growth stocks.
- Unlike SCHD, TBG's investment universe includes REITs, utilities, and Master Limited Partnerships (MLPs), offering broader diversification.
A Tale of Two Strategies
The core difference between SCHD and TBG lies in their management philosophy. SCHD is a passive fund that relies on a strict, computer-driven algorithm. It systematically screens for about 100 U.S. stocks based on metrics like return on equity, cash flow to debt, and dividend growth history. This hands-off approach has made it a low-cost favorite for years.
TBG, on the other hand, is an actively managed fund. Portfolio managers David Bahnsen and Brian Szytel make the final investment decisions, selecting a more concentrated portfolio of 30 to 40 companies. Their process involves a deep analysis of balance sheet strength, management quality, free cash flow, and projections for dividend sustainability.
The Human Element in Active Management
The managers at The Bahnsen Group, which oversees TBG, emphasize a clear objective. The primary measure of success, according to David Bahnsen, is "the achievement of superlative dividend growth with no dividend cuts across the portfolio." This focus is on the income stream itself, with the belief that strong total returns will naturally follow from companies that can consistently grow their dividends.
This approach contrasts with funds that may chase total returns by including high-growth stocks like Nvidia, which pay only a token dividend. TBG's managers aim for a balance of quality, a moderate starting yield, and consistent dividend growth, positioning it as a pure-play dividend growth fund.
By the Numbers: TBG vs. SCHD
- Expense Ratio: TBG at 0.59% vs. SCHD at 0.06%.
- SEC Yield: TBG at 3.6% vs. SCHD at 3.8%.
- Portfolio Size: TBG holds 30-40 stocks, while SCHD holds around 100.
- Annual Turnover: TBG has very low turnover (0-10%), while SCHD's is moderate (20-30%).
When Passive Algorithms Falter
For years, SCHD's model worked exceptionally well. A key part of its success was "portfolio recycling." The algorithm would sell stocks that had appreciated significantly (and thus had lower dividend yields) and reinvest the proceeds into higher-yielding, potentially undervalued stocks. This process, done annually in March, often boosted the fund's overall dividend growth into the double digits.
However, this same mechanism has recently become a weakness. The market rally has been heavily concentrated in a few large-cap tech and AI-related stocks, which typically fall outside of SCHD's high-dividend criteria. This has left SCHD with fewer appreciated stocks to sell, breaking its virtuous recycling engine.
The March 2025 Reconstitution
The fund's reconstitution in March 2025 proved particularly damaging. The algorithm sold 17 holdings that went on to perform well and shifted significant capital into the energy sector, including oil and gas producers. This move was based on strong past performance metrics.
Unfortunately, the timing was poor, as the energy sector underperformed shortly after. This automated trade resulted in an immediate drop in SCHD's dividend yield from 3.93% to 3.8% and weighed heavily on its total return, causing it to diverge negatively from its high-dividend peers.
Active managers argue that a human investor would likely not have made the same large, backward-looking sector bet at that specific market moment, highlighting the potential pitfalls of rigid, automated strategies.
A Broader Investment Universe
Another key differentiator is the scope of investments each ETF can make. SCHD's methodology explicitly excludes Real Estate Investment Trusts (REITs) and utility companies, two sectors traditionally known for reliable dividends.
Expanding the Dividend Pool
TBG's active approach allows it to invest in these excluded sectors. Currently, REITs and utilities make up nearly 19% of TBG's portfolio. Holdings include high-quality companies like Simon Property Group (SPG), a leading mall and retail center operator, and Brookfield Infrastructure Corporation (BIPC), a diversified infrastructure company.
Furthermore, TBG can hold Master Limited Partnerships (MLPs) such as Enterprise Products Partners (EPD) and Energy Transfer (ET). These midstream energy companies offer very high yields (6.9% and 8.0%, respectively) and are not available to SCHD. This flexibility allows TBG to source dividend growth from a much wider and more diverse pool of assets, even with a smaller number of total holdings.
Conclusion: A Place for Both?
While TBG's higher expense ratio of 0.59% may deter some investors compared to SCHD's ultra-low 0.06%, its recent outperformance suggests the price of active management may be justified in the current market. Managers of TBG have indicated the expense ratio may decrease as the fund's assets under management grow.
The recent struggles of SCHD do not necessarily invalidate its long-term appeal. Its low cost and disciplined approach remain attractive. However, its recent performance serves as a reminder that passive, rules-based strategies can have blind spots, especially during major market shifts.
For investors, the rise of an active challenger like TBG offers more choice. While SCHD remains a solid foundation, TBG's flexible strategy and broader investment scope have proven to be a valuable alternative, demonstrating that in the quest for dividend growth, a human touch can sometimes make all the difference.
