SCHG ETF: Living Up To Its Name, But Not For Income Investors

When it comes to investing, most investors fall into one of two camps (or take a blended strategy that involves a combination of the two). There are those who focus primarily on income. These folks buy stocks, bonds, or real estate for the cash flow that their investments can send their way on a monthly or quarterly basis. I tend to fall into this boat.

While I have some index funds in a workplace retirement account, I focus the investments I have more control over (i.e., an IRA or taxable account) on a combo of present and future income. I like stocks and funds that pay a relatively high dividend yield, as long as the payout has stayed stable or grown over a period of several years. I also like shares with yields that are close to the S&P 500 (SPY) as a whole as long as they have a likelihood of growing fairly rapidly in the future. My goal is to reinvest these dividends for the next several years before I hit the age or passive income level at which I can retire.

Not everyone has the same goals, however. Were I in my 20s, I would likely privilege growth over income. Unfortunately, that ship sailed a few years ago. Those who tend to focus on growth look for the trendy stocks that show a history of high share price growth (or at least the potential for rapid price appreciation). However, many times, it can be difficult to pick one or two stocks that will appreciate quickly. That’s where diversification can come into play and alleviate some of the risk. You’re not likely to see a return in the thousands of percent over a few years, but you’ll hopefully see a market-beating return while avoiding the possibility that the one or two companies in your basket go bankrupt.

Schwab’s U.S. Large-Cap Growth ETF

One ETF that’s focused on providing a high level of price appreciation over the long run is Schwab’s U.S. Large-Cap Growth ETF (NYSEARCA:SCHG). The ticker symbol is similar to Schwab’s popular U.S. Dividend Equity ETF (SCHD), but the goals of the two funds are quite different.

Over the past year, SCHD has actually outperformed its growth-oriented counterpart. However, over the past ten years, SCHG has largely lived up to its name, providing a high level of growth. SCHG is up 238% over the past ten years, which means that it’s more than tripled over that time frame. That plays out to a 13.88% compounded annual return over the past decade.

This number exceeds the 12.44% compounded annual growth rate that the S&P 500 has provided over the same period. It also exceeds the growth rate achieved by a competitor’s growth ETF. Vanguard’s Growth ETF (VUG) has grown “only” 214% over the past ten years, lagging well behind the 238% growth for SCHG.

According to Schwab, “The fund’s goal [SCHG] is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Large-Cap Growth Total Stock Market Index.” That index has 13.06% annualized return over the past decade, so SCHG exceeds its return.

VUG focuses on trying to mimic the CRSP US Large Cap Growth Index, which is slightly different. However, many of the same companies show up in similar percentages as holdings in both VUG and SCHG.

SCHG is heavily invested into tech stocks, with nearly 42% of the fund’s holdings made up of tech companies. Health care stocks make up an additional 16%. These are high-growth sectors of the economy. Overall, SCHG holds 247 companies in the fund, and all of the top 10 holdings are in the tech or health care sectors. Of course, if the tech sector were to crash as it did in the early 2000s or if Medicare for all ever took off, companies like Alphabet (GOOG) (GOOGL), Tesla (TSLA), or UnitedHealth Group (UNH) could see their growth evaporate.

Nothing is a sure thing when investing, but the diversification provided by an ETF like SCHG, along with an ability to pivot to other growth areas that might emerge should allow investors to avoid some of the biggest threats.

Income From SCHG

Investors who are interested in income will likely find SCHG’s dividend payout underwhelming. Several of the holdings in the top 10 either pay out no dividend or a very anemic dividend. The current dividend over the past 12 months makes up 0.50% of the fund’s share price. That means an investor would earn a whopping $0.50 per $100 invested.

There are other options that are much more lucrative. Schwab’s dividend-focused fund SCHD or Vanguard’s High Dividend Yield ETF (VYM) would provide better options for dividend investors who would still like to see some growth. Both offer current yields in the 3-3.5% range. It’s also possible to pick individual stocks and bonds with yields that are much higher. Building a portfolio with several companies with solid balance sheets could provide for a yield in the 5% or 6% with a relatively decent risk profile. SCHD has performed better on a price basis over SCHG over the past year, with the former dropping by less than 1% over that time, whereas SCHG has lost 12.09%. While the high-growth option has higher long-term returns, during the current bear market, this has not been the case.

Those who are looking for dividend growth will also find SCHG underwhelming on that front. The dividend has actually declined by more than 3% annually over the past five years. Indeed the current dividend of $0.31 of the past year is lower than the payout from 2014.

Conclusion

There are portfolios that could benefit from a fund like SCHG. The growth record is there. From a share price of around $12.79 at its inception in December 2009, it’s grown to $61.18 as of January 27, 2023. Overall, it’s grown 378% from the fund’s inception. Those who are looking for a high level of share price growth would do well to look into it. It is a strong fund with a strong record of price appreciation and a very low 0.04% expense ratio. I am not planning on buying any in the near term, although I would not rule it out if I want to juice the growth portion of my portfolio in the future.

Those who are interested in current or near-term income will probably want to put their investment dollars elsewhere. The very low yield will not allow for the use of current dividend payments for expenses without selling shares unless one has pretty low annual expenses and a very large investment. You’d need $10 million invested in SCHG to have $50k in annual income without selling any shares. There are better options in that regard, as noted above.