If you're a fan of the Schwab U.S. Dividend Equity ETF (SCHD 0.10%), March tends to be an important month. That's when the fund completes its annual reconstitution and essentially becomes a whole new portfolio.
Now, reconstitutions and rebalances aren't anything unusual. ETFs do them all the time. But they usually result in only minor changes to the portfolio.
When you're a fund like the Vanguard High Dividend Yield ETF that simply targets stocks with above-average yields, that universe doesn't change much. Sure, you'll get some new additions and deletions here and there, but the high-level look of the fund itself isn't significantly altered.
The Schwab U.S. Dividend Equity ETF is different. Since it considers so many factors, including measures of balance sheet health, dividend growth history, and yield, a change to any one of those factors could get the stock kicked out of the index. The fund only holds 100 stocks. Given the high bar to qualify for the portfolio, any misstep could be costly for a stock.
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It's not unusual to see about 15 to 20 names change in the 100-stock portfolio at a reconstitution. In 2025, 17 stocks were deleted and 20 were added.
Last year's reconstitution was notable because it resulted in a major shift in the portfolio's sector allocation. Specifically, financials went from 17.2% of the fund to 8.5%, while energy went from 12.2% to 21%. Consumer staples also saw a meaningful allocation increase, while healthcare saw its position decrease.
The energy/staples overweight has been a big reason why the Schwab U.S. Dividend Equity ETF has become an elite performer again in 2026. If you believe those two sectors will continue outperforming, you'll want to pay attention to what happens later this month. It's possible, maybe even likely, that those sectors will account for much less of the portfolio in a couple of weeks.
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Key Data Points
Here are three predictions for what I think could happen to this ETF post-reconstitution:
1. Financials becomes the biggest sector holding once again
It was a bit of a surprise to see the financial sector, which often gets one of the biggest representations in this fund, get such a big haircut in the last reconstitution. Many of these companies have above-average yields. And they usually score well on cash flow metrics and return on equity.
2026 could be the year the financials sector makes a comeback.
It's worth noting that even today, the financial sector accounts for 35 positions within the fund (although the majority have weightings of 0.2% or less). Many companies in this industry already qualify, and modest improvements could yield a big weighting increase.
2. Energy sees a substantial allocation reduction
Energy has never seen a weighting in this fund anywhere near its current 20% allocation. The highest it has ever been sustainably is around 15%, right after the Schwab U.S. Dividend Equity ETF launched in 2012. Since then, it has most often been in the 5%-10% range but bottomed out at around 2% in 2021.
A mean reversion seems more than likely here. Energy prices had been trending lower all throughout 2025, and that likely impacted some of the financial measures this fund will use.
3. Tech gets a small bump
Tech is obviously not a go-to sector for dividend stocks. But there's little question that the artificial intelligence (AI) revolution has been the tide that's lifted all boats in this group.
There are only three tech stocks in this portfolio currently. Texas Instruments and Cisco Systems have relatively healthy 3.5% allocations, and Skyworks Solutions is only at 0.3%. Given the sector's revenue and earnings growth over the past year, I wouldn't be surprised to see these companies get a modest weighting increase or the sector add a couple of names to the fund.
Possible additions to watch for
It's tough to pick out specific names that might be in or out, but here are a couple I'd watch for:
- CME Group: A 15-year dividend growth streak, low payout ratio, 1.7% yield, and solid net income growth -- it checks all the boxes.
- Qualcomm: Negative earnings growth could keep it out, but the dividend profile is rock solid.
- Emerson Electric: Forecast earnings growth is good, and it's raised its dividend for 68 straight years. The 1.6% yield won't win it points, though.
