SCHD's Underperformance Amid Macroeconomic Headwinds: A Sectoral and Recession Preparedness Analysis

The Schwab U.S. Dividend Equity ETF (SCHD) has faced a challenging 2025, underperforming the broader S&P 500 as investors flocked to high-growth technology and AI-driven stocks. This divergence highlights a critical structural issue: SCHD's portfolio is weighted toward stable, dividend-paying companies in sectors like healthcare, energy, and consumer staples, which have lagged behind the explosive gains of the "Magnificent 7/Great 8" tech firms. While this strategy has historically prioritized income over capital appreciation, it has left the ETF exposed to macroeconomic shifts and sector-specific headwinds.

Sectoral Exposure: A Double-Edged Sword

SCHD's underperformance is rooted in its sector allocations. As of July 2025, the ETF allocates just 9% of its assets to technology, compared to the S&P 500's 35%, according to a TheStreet analysis. This stark underrepresentation in the market's dominant sector has limited its ability to capitalize on the AI and tech boom. Meanwhile, energy and healthcare-two of SCHD's largest holdings at 19.23% and 15.53% respectively-have delivered mixed results. Energy companies like Chevron and ConocoPhillips have benefited from rising oil prices but remain overshadowed by the capital appreciation of tech stocks, according to SCHDCalc. Healthcare, while resilient, has seen modest growth compared to the sector's historical outperformance during downturns, per Visual Capitalist.

The ETF's March 2025 rebalancing, which increased energy exposure while reducing allocations to financials and utilities, was noted by Visual Capitalist and has not offset its structural misalignment with market leadership. Analysts argue that unless investor sentiment shifts toward value stocks and income-generating assets, SCHD's underperformance is likely to persist, as highlighted by TheStreet.

Macroeconomic Headwinds: Bonds vs. Dividends

Rising U.S. Treasury yields have further pressured dividend-focused ETFs like SCHD. The 10-year Treasury yield, which approached 5% in late 2025, has made fixed-income investments more attractive than dividend-paying stocks, according to AcuityKP. This shift is compounded by trade policy uncertainties, including potential trade wars and elevated U.S. tariffs, which have introduced volatility into global markets, as noted by SCHDCalc. The Federal Reserve's accommodative monetary policy, including rate cuts in September 2025, has supported risky assets but has not reversed the trend of investors favoring growth over income, according to Visual Capitalist data.

The macroeconomic environment has also fueled fears of stagflation-higher inflation paired with weak growth-which has driven capital toward defensive assets like gold and high-quality bonds, a trend AcuityKP highlights. For SCHD, this means competing with alternatives that offer similar yield profiles with lower volatility.

Recession Preparedness: A Historical Perspective

Despite its current struggles, SCHD's defensive sector allocations may offer resilience in a potential recession. Historical data from past downturns, such as the 2020 pandemic-induced recession and the 2008 financial crisis, shows that healthcare and consumer staples-SCHD's core holdings-tend to outperform. During the 2020 recession, the healthcare sector in SCHD declined by -13.1%, significantly less than the -50.2% drop in energy, according to SCHDTools. Backtested data for the 2008–2009 crisis suggests that a hypothetical SCHD portfolio would have experienced a -45.2% drawdown, outperforming the S&P 500's -55.3% decline, per SCHDTools.

Consumer staples, another key component of SCHD, have historically maintained positive returns during recessions due to their essential nature, as Visual Capitalist documents. This defensive positioning could become a critical advantage if economic growth slows or trade tensions escalate.

Conclusion: Balancing Income and Growth

SCHD's underperformance in 2025 reflects a broader market shift toward growth stocks and capital appreciation, leaving dividend-focused ETFs in the shadows. However, its emphasis on high-quality, defensive sectors positions it as a potential safe haven in a recessionary environment. For income-focused investors, the ETF's 3.8% yield and low expense ratio remain attractive, particularly in a high-yield bond market, a point made by SCHDCalc. The challenge lies in navigating the current macroeconomic landscape while maintaining a long-term perspective on its defensive characteristics.

As the Fed's policy trajectory and global trade dynamics evolve, SCHD's ability to adapt its sector allocations-or benefit from a rotation toward value stocks-will determine its future performance. For now, it serves as a reminder that while income investing may lag in bull markets, it can provide stability when the tides turn.