Daniel Foelber, The Motley Fool
5 min read
The major stock market indexes rallied following midterm election results, with the S&P 500 (SNPINDEX: ^GSPC) up 1.6% and the Dow Jones Industrial Average (DJINDICES: ^DJI) gaining 3% on the session. From a sector perspective, the biggest winners were healthcare and consumer staples — both of which closed at all-time highs. Amid Republican control of the Executive Branch and Democrats gaining the majority in the Senate and House, investors are piling into safe sectors that tend to do well regardless of political and economic uncertainty.
The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) — which we’ll simply refer to as SCHD going forward — is heavily concentrated in these sectors. So it’s no surprise it added to its already red-hot gains to close at an all-time high. Meanwhile, McDonald’s (NYSE: MCD) roared 6.5% higher on Nov. 4 but is still down big year-to-date. Here’s why McDonald’s stands out as an even better buy than SCHD.
Missed AI’s “Act 1”? Act 2 Could Be 16x Bigger. Most investors think they missed the AI boat because they didn’t buy Nvidia in 2005. But according to our analysts, we’re only at the end of “Act 1″—the R&D phase. “Act 2” is the global rollout. Continue »
High income, high turnover
The Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 Index, which is rebalanced quarterly into a basket of high-yield dividend stocks. The rebalancing emphasizes yield. So the index will sometimes cycle out of stocks whose yields are declining because their stock prices are rising faster than their dividend growth rates. And similarly, it will cycle into stocks and sectors with rising yields.
In March, the ETF had a 23.9% energy sector weighting. But after multiple rebalances, the energy sector weighting fell to 15.4% as of Sept. 30. In market-cap-weighted indexes like the S&P 500, outperforming sectors gain higher weightings, not lower ones.
With less energy sector weighting, SCHD cycled into more consumer staples, healthcare, and high-yield technology stocks. The strategy is paying off, as the energy sector sold off while consumer staples and healthcare rose following the midterm election results. But this practice leads to heavy trading, with the ETF featuring a 40.6% portfolio turnover rate as of Sept. 30, 2026, which is unappealing to long-term investors looking to build a portfolio around core holdings.
All told, SCHD is a good ETF for generating passive income because it prioritizes allocating toward high-yield, industry-leading companies. But investors should be aware that its year-to-date gains are particularly high because SCHD has been rotating into hot sectors and out of cold sectors simply by the nature of its rules-based methodology — not some magic formula. These mechanics are coincidentally maximizing gains this year. But that same method can backfire if a leading sector continues producing strong gains, or if a beaten-down sector continues to sell-off.
