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SCHD vs. VOO: Which should you invest in?

VOO is a market index ETF that aims to track the performance of the overall US market using the S&P 500. SCHD is a dividend ETF that generates quality and sustainable dividends. But what does this mean for you as an investor?

In this post, we’ll compare VOO and SCHD diversification, performance, fees, and tax efficiency to help you decide which is right.

 

What is VOO?

 

The Vanguard 500 Index Fund (VOO) is Vanguard’s S&P 500 index-tracking ETF offering. It is the ETF alternative to Vanguard’s VFIAX, which is a mutual fund.

 

VOO‘s main objective is to generate similar overall returns as the market using the S&P 500 as its index. The ETF is inherently diversified and is generally considered safer than holding individual stocks within an index.

 

What is SCHD?

 

The Schwab U.S. Dividend Equity ETF, or SCHD, is a dividend ETF offered by Charles Swab Asset Management. Its objective is to track the performance of the Dow Jones U.S. Dividend 100 Index.

 

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The Dow Jones U.S Dividend 100 Index measures the performance of high-dividend-yielding stocks in the U.S. that have shown a consistent record of paying high dividends. The SCHD ETF aims to generate quality and sustainability of dividends.

 

VOO vs. SCHD Summary

 

VOO SCHD Edge
Fund Type ETF ETF Tie
Diversification S&P 500 Index Dow Jones U.S Dividend 100 Index Tie
Inception Date 2010 2011 Tie
Number of Holdings 505 104 VOO
Risk Rating Moderate Moderate Tie
Minimum Investment $1.00 $1.00 Tie
Expense Ratio 0.03% 0.06% VOO
Tax Efficiency ETFs generally are more tax-efficient ETFs generally are more tax-efficient Tie
Tax Loss Harvesting Funds must settle and may need 1-2 days to be available for reinvestment Funds must settle and may need 1-2 days to be available for reinvestment Tie
Trading and Liquidity Daily trading during Market Hours Daily trading during Market Hours Tie
Performance 26.25% in 2023 4.57% in 2023 VOO
Dividend Yield 1.43% in 2023 3.49% in 2023 SCHD

 

Diversification – VOO

 

VOO and SCHD invest in two different indexes and have two different diversification strategies.

 

VOO tracks the performance of the S&P 500 and, as a result, has approximately 500 holdings. On the other hand, SCHD invests in the Dow Jones U.S Dividend 100 Index.

 

VOO invests in generating returns similar to those of the overall market, while SCHD creates a portfolio designed to maximize dividends.

 

Below is the portfolio breakdown by sector for VOO and SCHD as of Jan 2024.

 

Keep in mind that the exact portfolio composition will change as the ETFs are reconstituted quarterly.

 

Industry VOO SCHD
Information Technology 28.90% 12.58%
Health Care 12.60% 15.90%
Financials 12.90% 16.73%
Consumer Discretionary 10.90% 9.41%
Communication Services 8.60% 4.35%
Industrials 8.80% 17.14%
Consumer Staples 6.20% 11.95%
Energy 3.90% 9.25%
Materials 2.40% 2.31%
Real Estate 2.50% 0.00%
Utilities 2.30% 0.39%

 

From the table above, you can see that VOO and SCHD have very different portfolio compositions. VOO’s three primary sectors are information technology, healthcare, and financials, whereas SCHD’s primary sectors are industrials, financials, and healthcare.

 

VOO’s top three sectors account for 54.40% of the portfolio, whereas SCHD’s top three sectors account for 49.77%. VOO is a bit more concentrated in the top 3, but SCHD has several sectors with little to no exposure, whereas VOO has at least 2% exposure to all sectors.

 

Likewise, we can look at each fund’s top 10 holdings to see how they differ.

 

One key distinction is that these two ETFs have no overlap in coverage; they have distinct top 10 holdings.

 

SCHD’s top 10 holdings account for 40.47% of the portfolio, whereas VOO’s top 10 holdings only account for 30.75%. SCHD is more concentrated in the top 10 by 10% and only holds approximately 100 stocks, whereas VOO holds close to 500. This means that SCHD will be more concentrated than VOO.

 

Overall, if diversification is a top priority, then VOO is a better option since it is more diversified among sectors and also more diversified among its holdings, including its ten largest holdings.

 

Minimum Investment – Tie

 

Both VOO and SCHD require a minimum investment of $1.00. Since these are both ETFs, they can be traded on fractional shares, allowing for even the smallest investment. For most Vanguard ETFs, minimum investments are $1.00 and have minimum fees, making investing in either VOO or SCHD easy.

 

Expense Ratio – VOO

 

VOO has an advantage in expense ratio, with an expense ratio of 0.03%, whereas SCHD has an expense ratio of 0.06%, which is double the cost of VOO.

 

The industry average expense ratio is 0.25%, and VOO and SCHD are relatively inexpensive compared to other ETFs.

 

While VOO has the advantage in terms of lower expense ratios, both ETFs have relatively low expense ratios.

 

Trading and Liquidity – Tie

 

Since they are both ETFs, VOO and SCHD have the same trading and liquidity characteristics.

 

Investors can buy and sell ETFs throughout the day at any time during market hours. This is not the case with mutual funds, which are only traded at the end of the day based on Net Asset Value (NAV).

 

ETFs’ trading flexibility doesn’t come without drawbacks, though—they typically trade at prices slightly different from their NAV. This difference is called a bid-ask spread.

 

ETFs offer an advantage to investors who trade daily or change positions frequently. Since they can trade throughout the day, whereas mutual funds, you have to wait until the day is closed.

 

Tax Efficiency – Tie

 

When comparing two different investment options, it’s essential to consider the tax implications and not only the returns they generate. The tax implications of an investment can have a significant impact on which investment generates higher after-tax returns.

 

Generally, ETFs will have a slight edge from a tax efficiency perspective. ETFs tend to distribute comparatively fewer capital gains to shareholders – these same gains are simply more challenging to manage efficiently from a mutual fund.

 

Since both VOO and SCHD are ETFs, they offer the same tax advantages and efficiencies.

 

Tax Loss Harvesting – Tie

 

As ETFs, both SCHD and VOO have the same rules and regulations.

 

Tax-loss harvesting is a strategy that involves selling investments at a loss to offset gains (and up to $3,000 in ordinary income). Tax-loss harvesting only matters in taxable investment accounts since you aren’t taxed on capital gains in tax-deferred accounts.

 

While this strategy can be implemented using any type of investment (stocks, ETFs, mutual funds, or other property), mutual funds have an advantage because of how they are traded.

 

When you sell an ETF, you’ll have to wait for the funds to settle before reinvesting the proceeds. This wait, commonly referred to as T+2, maybe one or two days before you have access to the funds.

 

If you prefer the tax-loss harvesting rules of a mutual fund, opting for a similar S&P-indexed mutual fund might be a better option. VOO offers a mutual fund alternative, VFIAX, with a minimum investment of $3,000.

 

Performance & Dividends – VOO(Returns) and SCHD(Dividends)

 

The performance of an investment option is often one of the most critical aspects investors consider. The table below shows the total annual returns between VOO and SCHD.

 

Total Return by NAV
Year VOO SCHD Delta
2023 26.33% 4.57% -21.76%
2022 -18.15% -3.23% 14.92%
2021 28.66% 29.87% 1.21%
2020 18.35% 15.08% -3.27%
2019 31.46% 27.28% -4.18%
2018 -4.42% -5.56% -1.14%
2017 21.78% 20.83% -0.95%
2016 11.93% 16.44% 4.51%
2015 1.35% -0.31% -1.66%
2014 13.63% 11.69% -1.94%

 

From the table above, you can see that VOO has a clear advantage in annual returns. Over the last 10 years, VOO has outperformed SCHD in eight years. On average, VOO has outperformed SCHD by 3.80%. In 2023 the outperformance was significant for VOO with 21.76% outperformance.

 

This performance discrepancy is not unexpected since SCHD is a dividend ETF with the objective of distributing yearly income.

 

The table below will show the dividend yield for both ETFs.

 

Year VOO SCHD Delta
2023 1.56% 3.49% 1.93%
2022 1.50% 3.58% 2.08%
2021 1.36% 3.15% 1.79%
2020 1.84% 2.87% 1.03%
2019 1.94% 3.34% 1.40%
2018 1.80% 2.91% 1.11%
2017 1.89% 2.66% 0.77%
2016 2.06% 2.85% 0.79%
2015 1.97% 2.82% 0.85%
2014 1.84% 2.57% 0.73%

 

The table shows that SCHD has outperformed VOO in dividend yield for the last ten years. SCDH has outperformed by an average of 1.25% over those ten years, but that outperformance has increased; over the last three years, SCHD has outperformed VOO by 1.93% on average each year.

 

SCHD is an ETF that is designed to invest in stocks that generate dividends. As a result, it has the advantage of dividend yield. On the other hand, VOO has a clear advantage in terms of annual and cumulative returns.

 

VOO vs SCHD: Where Should You Invest?

 

VOO and SCHD are two ETFs with different purposes. Therefore, it’s important to understand your investment objectives before you invest in either.

 

VOO is designed to generate returns similar to those of the S&P 500 index, which means you can expect returns similar to those of the overall market. In contrast, SCHD tracks the performance with the goal of quality and dividend sustainability. The SCHD is aimed at generating dividends, and the companies follow this principle.

 

Some key differences between VOO and SCHD come from the expense ratio and diversification strategy. The VOO expense ratio is half the cost of SCHD. In addition, VOO is more diversified than SCHD. VOO holds nearly 500 stocks and is more evenly split between industries, while SCHD is more concentrated by sector and in its top 10 holdings.

 

Since both VOO and SCHD are ETFs, they have the same characteristics when it comes to tax efficiency, tax loss harvesting, and minimum investment requirements.

 

Overall, if you are looking for an ETF that generates high dividends, then SCHD is the better option. However, if you are looking for a secure ETF that will provide you with returns similar to those of the overall market, then VOO is the better option.

 



 

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