VOO vs. SCHD: Comparing Two Popular US Equity ETFs
SCHD and VOO are exchange-traded funds (ETFs) that can be bought and sold on stock exchanges throughout the day. SCHD, a fund managed by Charles Schwab, passively tracks the Dow Jones U.S. Dividend 100 Index. It was introduced on Oct 20, 2011. On the other hand, VOO, managed by Vanguard, passively tracks the S&P 500 Index and was launched on Sep 7, 2010. Both SCHD and VOO are categorized as passive ETFs, which means they do not involve active management but rather strive to closely replicate the performance of their respective underlying indices.
This article compares a Vanguard ETF with ticker VOO with a Charles Schwab ETF with ticker SCHD.
The VOO and SCHD ETFs are two popular exchange-traded funds that offer investors exposure to the U.S. stock market. While they both invest primarily in U.S. equities, they differ in their investment objectives, portfolio composition, and expense ratios:
Vanguard S&P 500 Index Fund ETF (Ticker: VOO)
The Vanguard S&P 500 Index Fund ETF is an investment vehicle that aims to replicate the performance of the S&P 500 Index. The S&P 500 is a widely recognized stock market index that comprises 500 leading publicly traded companies in the United States. It is an important benchmark index used by investors and financial analysts to assess the overall performance of the US stock market.
Thus, investing in an ETF like VOO allows an investor to conveniently track the SP500 without the hassle of having to invest in all 500 companies in the index. This simplifies the aim of diversification especially for the retail investor.
Top 10 Holdings of the VOO:
- Microsoft Corp
- Alphabet Class A
- Berkshire Hathaway Inc. Class B
- Alphabet Class C
- Exxon Mobil Corp
Schwab U.S. Dividend Equity ETF (Ticker: SCHD)
As opposed to VOO, the Schwab U.S. Dividend Equity ETF tracks the performance of the Dow Jones U.S. Dividend 100 Index. The Dow Jones U.S. Dividend 100 Index is an index of 100 high-dividend-yielding U.S. stocks that have a record of consistently paying dividends and show fundamental strength based on financial ratios.
SCHD is an exchange-traded fund that seeks to track the performance of high dividend-yielding stocks issued by US companies that have a history of consistently paying dividends. The selection of stocks is based on fundamental strength relative to their peers, which is determined by analysing various financial ratios. The fund is designed to offer exposure to companies with strong financials that have a history of consistent dividend payments.
Top 10 Holdings of SCHD:
- Pepsico Inc
- Merck and Co
- Verizon Communications
- Home Depot
Comparing the metrics and performances of VOO and SCHD:
VOO has arguably the most consistent returns since its inception. Albeit, since inception, the two ETFs in question have had similar performances as indicated below:
Price to Earnings Ratio (PE)
Conversely, in terms of Price to Earnings Ratio (PE), SCHD seems to be cheaper. As of 03/31/2023, SCHD had a PE ratio of 13.86 times. However, VOO’s PE ratio was 20.9 times (as of 03/31/2023). This means that, based the stock prices and earnings as of 03/31/2023, VOO was considered to be relatively more expensive than SCHD.
Additionally, SCHD had a distribution yield of 3.64%, which is significantly higher than VOO’s distribution yield of 1.59%:
This means that SCHD is paying out a higher percentage of its net income to shareholders in the form of dividends. However, it is worth noting that a high dividend yield can sometimes be a red flag for investors, as it could indicate that the ETF’s underlying investments are not performing well.
However, it is important to keep in mind that a high dividend yield does not always indicate a worthwhile investment. In fact, a high dividend yield could be a red flag that the underlying companies in the ETF are in financial distress.
For example, a company’s share price may fall due to financial troubles, but the company may still be paying out high dividends. This can result in a high dividend yield for the ETF, but it could also mean that the company is struggling to maintain its financial health and may need to reduce or eliminate its dividend in the future. This could lead to a decline in the ETF’s share price as investors react to the news.
It is important for investors to do their research and look beyond just the dividend yield when evaluating an ETF. They should consider factors like the financial health of the companies within the ETF, their growth prospects, and other metrics like expense ratio and historical performance. By doing so, investors can make more informed decisions about whether an ETF with a high dividend yield a sound investment is or not.
However, in terms of SCHD’s expense ratio is twice as much that of VOO, i.e., 0.06%.
When investing in ETFs like VOO and SCHD, it is important to pay attention to the expense ratio.
In general, a lower expense ratio is better for investors because it means that more of their money is being invested in the actual assets of the fund rather than being eaten up by fees. For example, if you invest $1,000 in an ETF with a 0.03% expense ratio, you will pay $0.30 in fees each year. If you invest the same amount in an ETF with a 0.06% expense ratio, you will pay $0.60 in fees each year.
This might not sound like a lot, but over time, those fees can really add up and eat into your returns. For instance, if you were to invest $10,000 in an ETF with a 0.03% expense ratio and another $10,000 in an ETF with a 0.06% expense ratio and hold those investments for 20 years, assuming a 7% annual return, the ETF with the lower expense ratio would be worth about $49,725 while the ETF with the higher expense ratio would be worth about $46,166.
In other words, the higher expense ratio would have cost you nearly $3,500 in lost returns over the course of two decades. That is why it is important to choose investments with low expense ratios, as they can help you keep more of your money working for you.
Conversely, SCHD’s tracking error is relatively worse than that of VOO. VOO follows its benchmark quite accurately with an exceptionally low tracking error of 0.01. Conversely, SCHD has a tracking error of 10.93 according to Fidelity. Tracking error refers to the difference in performance between an investment portfolio and its benchmark index. It is a measure of how closely an investment portfolio follows its intended benchmark
When it comes to evaluating these two ETFs, it ultimately depends on the investor’s investment objectives and risk tolerance. If an investor is seeking broad exposure to the U.S. equity market, the VOO ETF may be the better option due to its low expense ratio and diversified portfolio. However, if an investor is looking for more consistent income through dividend payments, the SCHD ETF may be a better fit. Additionally, the SCHD may provide more stability during periods of market volatility due to its focus on high-quality companies with stable earnings and cash flows.
Overall, both the VOO and SCHD ETFs are strong options for investors seeking exposure to the U.S. equity market. It is important for investors to carefully evaluate their investment goals and risk tolerance before deciding on which ETF to invest in.