VYM Vs. SCHD: Which Is The Superior Dividend ETF?

As for dividend ETFs, the Schwab Strategic Trust – Schwab US Dividend Equity ETF (NYSEARC:SCHD) and the Vanguard High Dividend Yield ETF (NYSEARC:VYM) are two of the most popular with both sharing many similar, if not identical, characteristics. But should an investor be indifferent between the two? A closer look at ETF holdings indicates that VYM is slightly more asset intensive, which could be an advantage in an inflationary environment.

However, track records indicate that SCHD has done much better over a long period and produced superior risk-adjusted returns. Even in the high inflation environment of the past 2 years, VYM has not significantly outperformed SCHD. When it comes to dividend yield and dividend CAGR, SCHD also seems to have the upper hand. Overall, although both ETFs appear to be solid choices for dividend investors, I find SCHD to be the best.

A high level view

VYM is designed track the FTSE High Dividend Yield Index, using a replication technique. This means that the ETF is entirely passive and management has no leeway to act even if an opportunity for pricing error is identified. On the other hand, the passive nature of the fund allows for a very lean cost structure of only 0.06%.

On the other hand, SCHD is reference to the Dow Jones US Dividend 100 Index. However, management does not have a mandate to fully replicate the index. According to his prospectus, the fund aims to invest 90% of its assets in the benchmark, while there is discretion regarding the remaining 10%. Despite a more flexible investment policy, SCHD also offers a very lean cost structure with an expense ratio of only 0.06%, exactly like VYM.

In terms of AUM, ETFs are very similar, with VYM being slightly larger. However, VYM is more diverse as it includes more than 4 times the number of holdings of SCHD. In turn, this makes the latter slightly more focused in his top 10 position than his counterpart. That being said, I doubt this additional diversification will make a difference, given that both ETFs have a sufficient number of constituents.

In terms of sector exposure, financials dominate with a weighting of around 20%. However, VYM has more than double the energy exposure of its counterpart. In addition, utilities occupy a larger share of its portfolio, compared to SCHD. Both of these sectors are very asset-intensive, which could indicate better performance for VYM in an inflationary environment. VYM’s P/B ratio confirms its larger relative asset base as it stands at 2.7 versus 3.7 for SCHD.

Dividend profile

Both ETFs are identical in terms of dividend payment frequency as they make quarterly distributions to their shareholders. In terms of TTM yield, SCHD has the upper hand at 3.31%, compared to 2.94% for VYM. In terms of dividend growth, while VYM has a slightly longer track record of consecutive increases in distributions, SCHD’s 5-year dividend growth CAGR is more than twice the rate of VYM. So when it comes to the dividend profile alone, SCHD looks superior.

Return comparison

Although dividends are the main feature of both ETFs, capital appreciation is always welcome. In terms of total return, over a long 10-year period, SCHD has significantly outperformed its peer and even the broader market, represented by the SPDR S&P 500 Trust ETF (TO SPY). In terms of risk-adjusted returns, SCHD also performed better over the period as a whole, as indicated by its much higher Sharpe ratio.

As I mentioned, one of the differences between the two funds is asset intensity. VYM is more exposed to asset-heavy companies like energy and utilities, so in theory it should do better in a high inflation environment, much like the one of the past two years.

However, the data indicates that even with high inflation, VYM was unable to outperform, but just matched the returns of SCHD. Now that inflation seems to be calming down, this supposed advantage of VYM is likely to fade and it could continue to lag SCHD.

Conclusion

Despite having “high yield” in its name, the Vanguard High Dividend Yield ETF was outperformed by SCHD, as the latter has a superior dividend profile with higher yield and more than double the CAGR of dividends over the past 5 last years. In terms of total return, VYM has also lagged considerably over a long 10-year period. Its more asset-rich portfolio was unable to outperform, but just matched SCHD’s performance in the high inflationary environment of the past 2 years. For these reasons, I find SCHD to be the best ETF.