SCHD has a 0.07% expense ratio and trades with a tight penny bid/ask spread. According to etf.com, the fund tracks its index well, with a median tracking difference of -0.11% in the past year, essentially in line with its expense ratio. SCHD’s stakes in CFRA Buy recommended Home Depot, INTC and PG are only partially offset by a stake in Hold recommended UNP.
A second dividend ETF offered commission free on Schwab is WisdomTree US Quality Dividend Growth (DGRW 42 Overweight). This ETF also trades with a penny spread, but charges a 0.28% expense ratio — triple the fee of SCHD. This contributes to the wider -0.43% median tracking difference shown on etf.com.
Yet in the one-year period ended June 13, DGRW still outperformed SCHD by more than 300 basis points (17.5% vs. 14.4%). To CFRA, the performance gap is the result of what’s inside these two ETFs.
SCHD had 21% of its assets in consumer staples stocks, with information technology (21%) and industrials (19%) the next biggest. In contrast, DGRW had a smaller stake in the consumer staples (9%) and a larger stake in health care (17% vs. 7%) with CFRA Buy recommended AbbVie (ABBV 98 ****) and Johnson & Johnson (JNJ 123 ****) among top positions. In 2018, the consumer staples sector was the worst performer in the S&P 1500 index, while health care was a slight outperformer.
Despite its relative performance success, investors have gravitated toward the cheaper product. Thus far in 2018, the lower-cost SCHD has $570 million of net inflows, more than double the $215 million gathered by DGRW.
While both SCHD and DGRW earn a top rating from CFRA for their holdings, costs and more, we think investors need to go beyond finding a cheap ETF available commission free on their preferred brokerage platform. There are several dozen strong candidates offered by Invesco, iShares, SSGA, Vanguard and other asset managers worthy of consideration. The wrong choice could leave investors disappointed they did not dig deeper.
CFRA reports on more than 1,100 equity ETFs can help compare and contrast the array of ETF choices.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.