Investors evaluating passive exchange-traded funds (ETFs) can save themselves from headaches and negative surprises by taking just a few minutes to understand how an ETF’s underlying index works.
That’s especially true with dividend ETFs, including the Schwab U.S
Dividend Equity ETF (NYSEMKT: SCHD). A $96 billion behemoth, this ETF is the second-largest fund in its category and allocates 16.9% of its portfolio to energy stocks. The Schwab ETF’s energy exposure is high compared to some competing ETFs and more than 5x the weight assigned to that sector by the S&P 500.
Of course, that works for investors when energy equities are rallying, as has been the case this year. This dividend ETF is up nearly 19% year to date, trouncing the S&P 500 and its larger, less energy-exposed rival in the process. That’s good enough for some investors, but some inquiring minds want to know why this ETF leans heavily into the energy sector.