What's Happening?
Fidelity High Dividend ETF (FDVV) has outperformed the Schwab U.S. Dividend Equity ETF (SCHD) by approximately 5 percentage points annually over the past five years. This performance difference is attributed to FDVV's inclusion of mega-cap technology
stocks like NVIDIA, Apple, and Microsoft, which SCHD's rules-based screen excludes. SCHD, known for its focus on quality U.S. dividend payers, has a lower expense ratio and a higher yield compared to FDVV. However, FDVV's strategy of including high-dividend tech stocks has resulted in a higher total return. Over the trailing five years, SCHD returned 57.53% on a total-return basis, while FDVV returned 94.19%. The methodology difference between the two funds is significant, as FDVV's approach allows it to hold stocks that have driven market returns since 2020.
Why It's Important?
The performance gap between FDVV and SCHD highlights the impact of investment strategy and stock selection on fund returns. For investors, this underscores the importance of understanding the underlying methodology of ETFs and how it aligns with their investment goals. FDVV's inclusion of tech stocks has provided a significant boost to its returns, appealing to investors seeking growth alongside dividends. On the other hand, SCHD's focus on stable dividend payers offers a more conservative approach with reliable income. This divergence in strategy can influence investor decisions, particularly in balancing income needs with growth potential. The choice between these funds may also depend on individual tax situations and investment horizons, as FDVV's higher returns come with a higher expense ratio and potential tax implications.
What's Next?
Investors may consider adjusting their portfolios based on their risk tolerance and investment objectives. Those seeking higher total returns might allocate more to FDVV, while those prioritizing income stability may stick with SCHD. In tax-advantaged accounts, reallocating between these funds can be done without triggering capital gains taxes. However, in taxable accounts, investors might opt to direct new contributions to FDVV rather than selling existing SCHD holdings to avoid realizing gains. A blended allocation, such as a 60/40 split between SCHD and FDVV, could offer a balanced approach, maintaining income while gaining exposure to tech-driven growth.
