SCHD's Long-Term Value vs. Short-Term Tech Underperformance

The Schwab U.S. Dividend Equity ETF (SCHD) has long been a cornerstone for income-focused investors seeking stability in volatile markets. Its heavy allocations to defensive sectors-Energy (19.69%), Consumer Defensive (17.94%), and Health Care (17.46%)-are designed to buffer against economic downturns according to financial analysis. Yet, in a market increasingly driven by technology sector momentum, SCHD's underperformance in recent quarters has sparked debates about its relevance. This article argues that SCHD's defensive tilt and high dividend yield offer critical ballast for risk-adjusted returns, but its lack of exposure to high-growth tech stocks necessitates a strategic rebalancing of dividend-focused portfolios to align with evolving market dynamics.

Defensive Allocation and Downside Protection

SCHD's sector composition reflects a deliberate focus on industries with stable cash flows and consistent dividend histories. Energy, for instance, constitutes nearly 20% of its holdings, a sector that historically outperforms during inflationary periods. Similarly, Health Care and Consumer Defensive stocks provide resilience during economic contractions, as demand for essential goods and services remains relatively inelastic. This defensive bias is further reinforced by the ETF's concentration in large-cap stocks (90.59% of holdings), which tend to exhibit lower volatility compared to smaller firms.

The trade-off for this stability is limited participation in high-growth sectors. Technology, which has driven much of the equity market's gains in recent years, accounts for a negligible portion of SCHD's portfolio. This structural underexposure explains its 1-year return of -2.98% in Q3 2025, lagging behind tech-focused ETFs like XLK and VGT. However, over longer horizons, SCHD's risk-adjusted returns remain competitive. Its Sharpe ratio of 0.83 in 2025 outperforms XLK (0.72) and VGT (0.60), underscoring its efficiency in generating returns relative to volatility.

The tension between defensive stability and tech-driven growth is evident in SCHD's beta of 0.85 compared to VGT's 1.16 according to ETF comparisons. While tech ETFs amplify market gains during upswings, they also magnify losses during corrections. For instance, VGT's maximum drawdown of -54.6% in recent years contrasts sharply with SCHD's -33.4%, highlighting the latter's role as a portfolio stabilizer. Yet, this comes at the cost of missing out on the explosive returns of tech stocks, which have delivered 879.26% gains since 2011 compared to SCHD's 262.64%.

This dichotomy raises a critical question: How should investors balance the need for income and downside protection with the allure of tech's growth potential? The answer lies in strategic rebalancing rather than a binary choice. A portfolio that combines SCHD's defensive characteristics with a smaller allocation to tech ETFs can harness both stability and growth. For example, a 60/40 split between SCHD and VGT would reduce overall volatility while retaining meaningful exposure to innovation-driven sectors.

Strategic Rebalancing for Risk-Adjusted Returns

The key to optimizing risk-adjusted returns lies in aligning portfolio allocations with macroeconomic conditions and investor risk tolerance. In a low-interest-rate environment, tech stocks often outperform due to their growth prospects and low discount rates. However, as interest rates normalize and market volatility rises, the defensive tilt of SCHD becomes increasingly valuable. By dynamically adjusting the weight of dividend-focused and tech-oriented assets, investors can mitigate the cyclical underperformance of either strategy.

Moreover, SCHD's low expense ratio of 0.06% makes it an attractive option for long-term investors prioritizing cost efficiency. Pairing it with higher-cost, high-growth ETFs allows investors to leverage the strengths of both without overexposing their portfolios to single-sector risks. For instance, a diversified approach incorporating SCHD, XLK, and SPMO could balance income, growth, and tactical market exposure.

Conclusion

SCHD's underperformance in a tech-driven market is not a flaw but a feature of its design. Its defensive sector allocations and focus on dividend stability provide a counterweight to the volatility of growth stocks, making it a vital component of a well-structured portfolio. However, relying solely on SCHD risks missing out on the transformative potential of technology. The solution lies in strategic rebalancing-leveraging SCHD's downside protection while selectively allocating to tech ETFs to capture growth. In an era of rapid innovation and economic uncertainty, this balanced approach offers the best path to achieving risk-adjusted returns over the long term.