The Schwab U.S. Dividend Equity ETF (SCHD) is frequently evaluated on its performance during market upswings, leading some to question its value. However, an analysis of its underlying index and historical data shows the fund is structured primarily for risk management, offering downside protection and lower volatility, particularly during market downturns.
Key Takeaways
- The Schwab U.S. Dividend Equity ETF (SCHD) is structured to provide downside protection and lower volatility, rather than to lead performance in bull markets.
- The fund's underlying index, the Dow Jones U.S. Dividend 100, has outperformed the S&P 500 since 1999, primarily due to its resilience during market declines.
- Data shows the index experienced significantly smaller losses in down markets (-0.49%) compared to the S&P 500 (-15.27%) over the same period.
- SCHD offers a low expense ratio of 0.06% and a dividend yield of approximately 3.79%, appealing to income-focused and conservative investors.
Understanding SCHD's Investment Methodology
The Schwab U.S. Dividend Equity ETF (SCHD) follows the Dow Jones U.S. Dividend 100 Index. This index selects 100 U.S. stocks based on fundamental strength, focusing on the quality and sustainability of their dividends.
The methodology screens for companies with a consistent record of paying dividends and strong financial health. This process naturally favors mature, stable companies over high-growth, speculative stocks.
Portfolio Composition
The top holdings in SCHD reflect its conservative approach. These are typically large-cap companies from sectors like healthcare, industrials, consumer staples, and energy. As of late 2025, top positions included companies such as AbbVie Inc., Lockheed Martin Corporation, and Cisco Systems, Inc.
This composition means the fund is not designed to capture the rapid gains often seen in technology-driven bull markets. Instead, its core objective is to provide a steady income stream and preserve capital, making it a tool for specific investment styles.
Historical Performance of the Underlying Index
To fully understand SCHD's behavior, it is essential to analyze the long-term performance of its underlying index, which has data available since 1999. This period includes major market downturns such as the dot-com bust (2000-2002), the 2008 financial crisis, and the 2022 bear market.
According to data from FactSet and Morningstar, the Dow Jones U.S. Dividend 100 Index generated an average annual return of 10.53% from January 1999 to September 2025. This compares favorably to the S&P 500's average return of 8.34% over the same timeframe.
Performance in Different Market Conditions
The source of this outperformance is critical. During up markets, the SCHD index slightly lagged the S&P 500, with an average 12-month rolling return of 15.15% versus 16.42%.
However, the difference in down markets is substantial. The SCHD index had an average 12-month rolling loss of just -0.49% in down markets. In contrast, the S&P 500 experienced an average loss of -15.27% under similar conditions.
Performance During Major Downturns (Index Data)
- 2000: +21.22% (vs. -9.09% for S&P 500)
- 2001: +8.31% (vs. -11.88% for S&P 500)
- 2008: -24.76% (vs. -36.99% for S&P 500)
- 2022: -3.16% (vs. -18.10% for S&P 500)
This data illustrates the index's ability to mitigate losses during significant market stress.
This defensive characteristic is the primary driver of its long-term success. By losing less during downturns, the index has a smaller deficit to recover from, which contributes to its cumulative outperformance over many years.
Risk and Efficiency Metrics
Beyond returns, risk-adjusted metrics provide a clearer picture of an investment's efficiency. SCHD's underlying index has consistently demonstrated lower volatility and better risk efficiency compared to the broader market.
Volatility and Beta
The standard deviation, a measure of volatility, for the SCHD index since 1999 was 15.36%, slightly lower than the S&P 500's 16.43%. This indicates a smoother investment experience with less price fluctuation.
Furthermore, the index has a historical beta of 0.77. A beta below 1.0 suggests that the fund is less sensitive to the movements of the overall market, reinforcing its role as a defensive holding that does not move in lockstep with the S&P 500.
Lower volatility and a beta significantly below 1.0 are key indicators of a fund's defensive posture, suggesting it can provide a buffer during periods of market instability.
Sharpe Ratio and Inflation-Adjusted Returns
The Sharpe Ratio measures return per unit of risk. The SCHD index posted a Sharpe Ratio of 0.64, compared to 0.48 for the S&P 500. This indicates that investors were better compensated for the risk they took with the dividend-focused strategy.
The index also proved more effective at outpacing inflation. Analysis shows it beat the monthly Consumer Price Index (CPI) in 72.5% of the months studied, whereas the S&P 500 did so in 67.0% of months. For investors concerned with preserving purchasing power, this is a significant advantage.
Analyzing the ETF Since Inception
While index data provides a long-term view, the performance of the SCHD ETF itself since its inception in October 2011 confirms these defensive traits. In the period from October 2014 to September 2025, SCHD continued to demonstrate resilience.
During down markets in this period, SCHD's average 12-month rolling loss was -2.17%. The SPDR S&P 500 ETF (SPY) averaged a loss of -7.64% in the same down periods. While SCHD did underperform SPY in up markets (14.87% vs. 17.71%), its ability to protect capital remains evident.
Structural Advantages of SCHD
- Expense Ratio: At 0.06%, SCHD is one of the most affordable ETFs in its category, cheaper than SPY's 0.09%.
- Liquidity: SCHD is highly tradable, with a high daily dollar volume, ensuring investors can easily buy or sell shares.
- Dividend Yield: With a yield of approximately 3.79%, it provides a substantial income stream, which is attractive for retirees and income-focused investors.
Conclusion: The Right Tool for the Right Job
Criticism of SCHD for not keeping pace with growth-oriented funds during bull runs overlooks its fundamental purpose. The fund is not designed to be a market leader in every environment. Its construction and historical performance show it is a tool for risk management, income generation, and capital preservation.
For investors with a conservative or balanced approach, or those seeking to add a defensive component to a growth-oriented portfolio, SCHD's characteristics are highly appealing. Its track record of lower volatility, significant downside protection, and consistent income makes it a strong candidate for investors prioritizing stability over aggressive growth.
Ultimately, the suitability of SCHD depends on an investor's individual goals, risk tolerance, and time horizon. For those with a long-term perspective who value stability, the data suggests SCHD is a well-structured and effective investment vehicle.
