Are There Any Stocks in the Schwab U.S. Dividend Equity ETF That Should Be Excluded?
One of the most popular ETFs in the market is the Schwab U.S. Dividend Equity ETF (SCHD). Many investors, including myself, have invested in this fund. However, an interesting question has been raised regarding the stock selection criteria used for the ETF. Should certain stocks be excluded? Let's delve into this topic and explore the complexities behind such decisions.
The Rebalancing Methodology and Its Critiques
The SCHD ETF employs a specific rebalancing methodology based on indicated yield. This criteria involves removing stocks where the yield as a percentage of the stock price has dropped. Unfortunately, this method can have unintended consequences. For example, in the latest rebalance, Broadcom (AVGO) was dropped from the ETF. While the dividend yield did indeed decrease, it was due to the significant appreciation of the stock price over the past year, which has outpaced dividend growth. This automatic criterion has led to the exclusion of several winners, which is becoming increasingly problematic.
Proposed Changes to the Rebalancing Criteria
Given the current rebalancing methodology, I believe a shift to a yield on original cost criteria would be more appropriate. This approach would ensure that stocks with increasing yields relative to their original investment cost are retained. By doing so, investors could continue to benefit from the eventual capital appreciation while also maintaining dividend income. This would align with the long-term, buy-and-hold investment strategy that many investors pursue.
The Role of Expertise and Regulatory Factors
It is important to note that the inclusion or exclusion of stocks in ETFs like SCHD is determined by regulators and managers based on specific criteria outlined in the prospectus. These decisions are not influenced by individual opinions or disagreements. From my observations, some inexperienced investors or so-called 'stock conversationalists' who have not even invested a dime in the market often criticize the SP 500 or attempt to beat it, yet their performance does not match the index. This underscores the fact that attempting to time the market or beat it is almost always unsuccessful and often results in significant financial losses.
The Importance of Blue Chip Stocks and Long-term Investing
Investment legend Benjamin Graham, the author of the best-selling book "The Intelligent Investor," and Warren Buffett, the chairman of Berkshire Hathaway, have long advised against such practices. Too many new investors, who have not extensively read or researched stocks they plan to invest in, rush into the market with their 'yours or lack thereof' wisdom. These inexperienced investors often fail to realize the value of time in real and profitable investing. Time, after all, is a critical and irreplaceable element in successful investing.
By focusing on blue chip stocks and long-term investing strategies, these investors can benefit from the predictable trends and stable returns that have historically characterized such stocks. Trying to apply outdated methods or 'heard-say' strategies without a proper understanding of the market is a waste of time and resources. The golden opportunity to invest in the best blue chip stocks in the US and possibly the world is lost for those who do not take the time to learn and understand the market.
In conclusion, while the current rebalancing methodology of the SCHD ETF has its flaws, a shift to a yield on original cost criteria could be a positive step. It is crucial for investors to make informed decisions based on a thorough understanding of the market and to align their strategies with long-term goals. The success of investing lies not in trying to outsmart the market, but in leveraging time and expertise to build wealth over the long term.