The Schwab U.S. Dividend Equity ETF (SCHD +0.07%) is unquestionably one of the most popular dividend ETFs in the world today. Its stellar track record over the first decade of its life, its ultra-low expense ratio, and its smartly constructed investment methodology resulted in billions of dollars of net inflows over the past several years.
While the investor interest has continued, the strong performance has not. The bull market in technology, artificial intelligence (AI), and the "Magnificent Seven" stocks has not aligned with the fund's typical target of big, durable, and sometimes boring dividend payers. As a result, the Schwab ETF has trailed many of its dividend ETF peers and Morningstar's Large Value category for the past three years.
For the record, I still think this is a great ETF. Is 2026 the year it finally stages a comeback? I'm skeptical.
Let's run down its investment case.
Image source: Getty Images.
Four reasons why I'm not seeing a comeback for Schwab U.S. Dividend Equity ETF just yet
1. Sector allocation isn't aligned with the current rally
U.S. equity returns over the past three years have been driven almost exclusively by the technology and communication services sectors (in other words, the Magnificent Seven stocks). Industrials beat the S&P 500 (^GSPC +0.49%) in 2025, and the consumer discretionary sector has also beaten the index over the past three years, but that's been it. Everything else has lagged the S&P 500.
Not many tech stocks pay dividends, let alone have the dividend growth, quality, and high-yield characteristics that would qualify them for inclusion in the Schwab ETF's portfolio. Translation: It's been invested in all the wrong places, and we have yet to see a sustainable shift away from this trend.
2. Investors still want growth, not dividend yield
After three straight years of double-digit percentage growth from both the Nasdaq-100 and S&P 500, the 1% to 2% yields being offered by the latter index on long-term dividend growers simply isn't attractive enough. Dividends have been such a small component of total returns lately that investors see it as a drag on risk-adjusted returns, not a helper.
With the AI trade fueling a lot of optimism, investors still see the biggest potential coming from growth stocks.
3. The 3.7% yield isn't a driver
Several years ago, a lot of income seekers pushed into dividend equities because traditional fixed income was yielding next to nothing. That's not the case today. While short-term yields have come down from their highs, you can still capture a yield of more than 3.5% from the iShares 0-3 Month Treasury Bond ETF (SGOV +0.01%). If you want a safe and predictable yield, it's probably easier to just grab the Treasury bill yield and forgo the equity risk.
4. The energy sector being overweight presents problems
At its last rebalance, the Schwab ETF got a 19% allocation to the energy sector, far above the current 3% allocation the sector has in the S&P 500. Had energy stocks rallied, it would have looked great. But energy has been a deeply underperforming sector for a while. The current situation in Venezuela might end up boosting energy prices, but the global supply glut will probably suppress a lot of upside.
NYSEMKT: SCHD
Key Data Points
Four things that would help the bull case
1. Market breadth improves
Obviously, any rotation away from megacap tech stocks would help. We're starting to see that in the early stages of 2026. Value stocks and dividend payers are beating the S&P 500 so far, and that's helped this ETF get off to a good start. Sustained growth from value and defensive stocks would be a big plus, as it was in 2022.
2. Earnings leadership rotates
Tech earnings have driven growth as companies benefit from AI development. We'll start to see soon enough if all of that capital expenditure is worth it. If we see earnings growth rates begin to slow down from earlier high levels and other sectors help pick up some of the slack, the Schwab ETF should get a boost.
3. Energy sector gets a tailwind
Obviously, outperformance from this sector would be a big plus. For the reasons I laid out, I'm not sure if this is the year we get that, unless there's some type of geopolitical or supply shock. Absent that, this might be a non-factor.
4. A market correction
In 2022, value, dividend, and low-volatility stocks did exceptionally well, relatively speaking, as equities and bonds corrected deeply at the same time. Any risk-off shift that makes leaders out of defensive and dividend stocks would probably make leaders out of a lot of dividend ETFs.
Why this ETF is still worth considering
No investment strategy outperforms forever. The Schwab U.S. Dividend Equity ETF was in the top third of Morningstar's Large Value category for several years prior to 2023, when the bottom started to fall out.
However, the ETF's strategy is sound and well-constructed. It incorporates elements of dividend growth, dividend quality, and high yield to truly pull out the best of the best dividend stocks. These qualifiers help to act as a cross-check against other criteria so that no bad actors make it into the portfolio.
For a core dividend equity position in a portfolio, few do it better than this one. Whether that finally translates into market outperformance in 2026 remains to be seen.
