Vanguard High Dividend Yield ETF (VYM) vs. SCHD: Navigating Growth and Income in the AI Era

The year 2025 has cemented the dominance of artificial intelligence and tech innovation in global markets, reshaping investor priorities. Amidst this transformation, income-seeking investors face a dilemma: how to balance dividend stability with exposure to sectors driving growth. The Vanguard High Dividend Yield ETF (VYM) and Schwab US Dividend Equity ETF (SCHD) offer competing strategies, but one emerges as the superior core holding for investors navigating today's tech-centric landscape.

The Tech-Driven Rally and Its Implications

The AI boom has amplified the importance of sector allocation in portfolio performance. VYM's 31.71% weighting in technology—its largest sector—positions it to capitalize on advancements in semiconductors, cloud computing, and automation. This contrasts sharply with SCHD's focus on defensive sectors like consumer staples and utilities, which have struggled to keep pace in growth-driven markets. As of early 2025, this strategic difference has translated into stark performance gaps: VYM delivered a +3.25% YTD return, while SCHD lagged at -1.99%, underscoring the risks of overexposure to “value traps” in stagnant sectors.

Cost Efficiency and Risk-Adjusted Returns: VYM's Edge

Costs and risk-adjusted performance are critical for long-term success. VYM's 0.03% expense ratio—half of SCHD's 0.06%—reduces frictional drag, compounding its edge over time. This advantage is amplified by its superior Sharpe Ratio of 0.61, which measures returns per unit of risk. SCHD's near-zero Sharpe Ratio (0.02) reveals its inconsistent capital appreciation despite higher volatility (13.95% vs. VYM's 12.00%). For investors prioritizing stable, growth-oriented income, VYM's blend of low fees and efficient risk management is unmatched.

Sector Allocation: Growth vs. Dividend Reliability

While SCHD's 4.27% dividend yield appeals to income-focused portfolios, its sector allocations reflect a conservative mindset. Its 19.35% stake in consumer defensive stocks and exposure to cyclical industries like industrials and energy leaves it vulnerable to economic slowdowns or tech outperformance. VYM's broader diversification—530+ holdings across tech, healthcare, and financials—buffers against sector-specific downturns while maintaining a 1.54% dividend yield sufficient for passive income needs.

The Value Trap Conundrum

SCHD's high yield comes at the cost of growth potential. Its emphasis on firms with long dividend histories often means overexposure to mature, low-growth companies. In a market where tech and AI stocks are redefining profitability, this strategy risks locking investors into underperforming sectors. VYM's tech-heavy approach, by contrast, aligns with the $1.2 trillion AI investment pipeline projected for 2025-2030, ensuring its holdings remain positioned at the forefront of innovation.

Investment Strategy: Prioritize VYM as the Core Holding

For most investors, especially those in their accumulation phase, VYM's tech-driven growth profile and risk-adjusted dominance make it an essential core holding. Its broad diversification mitigates company-specific risks while capitalizing on sector trends. SCHD's role is more niche: it can supplement portfolios seeking supplemental income from stable, dividend-paying firms in defensive sectors, but should not anchor a growth-oriented strategy.

Final Considerations for 2025 and Beyond

As AI reshapes industries and valuations, portfolios must evolve. VYM's blend of dividend stability and growth exposure offers a pragmatic path forward. Investors should allocate the majority of their equity core to VYM, using SCHD selectively for income enhancement—while maintaining a strict watch on tech-sector valuations to avoid overconcentration. In a market where growth is the new dividend, VYM's balanced approach is the smarter bet for sustainable wealth creation.

Actionable Takeaway: Allocate 60-70% of equity exposure to VYM for tech-driven growth and risk-adjusted performance, pairing it with 20-30% in quality growth stocks or ETFs. Reserve SCHD for no more than 10-15% of equity capital to target defensive income streams without sacrificing growth momentum.