Schwab U.S. Dividend Equity ETF (SCHD) Alternative In Europe

Investors in Europe seeking a high-quality dividend ETF alternative to the popular US-based SCHD (Schwab US Dividend Equity ETF) have a variety of options available to them. In this blog post, we will explore one of the top SCHD alternatives that can be bought in Europe. The United States generally hosts one of the best stocks and the best dividend-paying companies overall. It is important to note that while these companies are domiciled in the US, many stocks operate all over the world. In this article, I want to compare SCHD against a possible alternative the Fidelity US Quality Income UCITS ETF (FUSD).

Before we start we need to clarify what are exchange-traded funds, an exchange-traded fund is represented as a stock in the stock market and by holding this specific stock you are holding a basket of stocks that correspond to an index (portfolio benchmark) that is tracking.

The current benchmark/portfolio
Schwab U.S. Dividend Equity ETF (SCHD)

SCHD is following the Dow Jones U.S. Dividend 100 Index. The Dow Jones U.S. Dividend 100 Index is designed to measure the performance of 100 high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios.

Fidelity US Quality Income UCITS ETF Review (FUSD)

The fund seeks to track the performance of the US Quality Income UCITS. Generally, the Index is designed to reflect the performance of stocks of large and mid-capitalization dividend-paying US companies that exhibit quality fundamental characteristics.

SCHD currently holds about 100 stocks which provides plenty of diversification, while FUSD currently holds about 110 stocks. Overall, I find both ETFs provide plenty of diversification in terms of the total amount of holdings, and personally, I am happy if an ETF holds about 100 stocks rather than having a large amount as I believe in the careful selection of stocks as such.

When looking at ETFs I find it crucial to have a look at the top 10 holdings to get a good feeling of the ETF and to see if it fits my profile and to see if these would be companies I would invest in myself. In this case, the top 10 holdings of SCHD are representing above 40% of the total holdings, which gives us a decent overview. While for FUSD the top 10 holdings are representing 33% of the total holdings which gives us a good overview as well.

The top 10 holdings (SCHD):

1. AbbVie Inc. - 4%

2. Coca-Cola Co - 4%

3. Amgen Inc -4%

4. Cisco Systems Inc.- 4%

5. Pfizer Inc - 4%

6. Chevron Corp - 4%

7. Home Depot Inc - 4%

8. Bristol Myers Squibb- 4%

9. Blackrock Inc- 4%

10. Verizon Communications Inc - 4%

    The top 10 holdings (FUSD):

1. Apple Inc. - 8%

2. NVIDIA Corp. - 7%

3. Microsoft Corp. - 7%

4. Broadcom Inc. - 3%

5. Eli Lilly & Co. - 2%

6. Visa Inc -2%

7. Mastercard Inc -2%

8. Home Depot Inc - 1%

9. Verizon Communications - 1%

10. Procter & Gamble Co - 1%

We can see that there is some small overlap between these two ETFs and that makes sense since they are both looking at qualitative dividend stocks. However, looking strictly at the top 10 companies my personal preference goes for FUSD based on the companies it holds. However, this is only part of the story since they account for less than 50% of the total portfolio. One thing to note already is if we look at the top holdings of FUSD we see more growth-oriented stocks vs SCHD, however, Apple and Microsoft are making a big portion of the index in the top 10 with a high allocation to both while SCHD has more of an even spread in the top 10. Therefore it is also important and exciting to look at sector diversification as it provides a good idea of how this fund is allocated through various sectors.

The top 5 sectors (SCHD)

1. Financials - 19%

2. Health Care - 17%

3. Consumer Staples - 14%

4. Industrials - 13%

5. Energy - 12%

The top 5 sectors (FUSD)

1. Technology - 38%

2. Health Care - 11%

3. Consumer discretionary - 10%

4. Financials - 10%

5. Communications - 7%

FUSD is closer to my ideal allocation, however, all of this should be considered with a grain of salt since these ETFs are rebalanced periodically. One downside for SCHD may be the allocation to Financials which can be high at 20%. For FUSD, one downside is the fact that Technology is allocated at above 38% while the consumer staples sector is missing in the top 5 sectors which I would have liked to see and would personally sacrifice other sectors. Overall, this is a personal preference.

Expense Ratio

When it comes to the expense ratio, the lower the better and I would generally like to see an expense ratio below 0.5%. Overall in Europe, I find the ETFs available a bit more expensive than what is available in the United States. In this case, SCHD has an expense ratio of 0.06% which for me is very low. FUSD has an expense ratio of 0.25% which is worse overall, however, it is to be noted that SCHD is not available in Europe and generally the ETFs in Europe are a bit more expensive. I personally prefer SCHD for a lower expense ratio as this will affect the overall performance in the Long term.

Performance

I want to look at both the capital appreciation, as well as the dividend growth over the last couple of years, and this for me is one of the reasons I included FUSD in this comparison vs other Dividend ETFs, as investors this is what we are looking to replicate and what we want to compare the most. Historical returns do not guarantee future returns but still, it is nice to compare.

Purely looking at capital appreciation in the last 5 years SCHD has increased over 40%, while FUSD has increased about 60% However, looking at a longer period these funds have performed better than this, In terms of pure capital appreciation FUSD has performed better due to the more growth oriented nature.

The major difference is in the starting dividend yield, at the time of writing the dividend yield for SCHD is 3.6%. Withpayout of 67 cent in 2020 to a payout of 99 cent payout in 2024 an increase of 58%. 

For FUSD The starting dividend yield at the time of writing is 2%  with respectable growth of the dividend over the years which has stabled a bit the last years. going from 15 cent per share  in 2020 to 19 cent per share in 2024 a growth of 27%. 

Strictly looking at the dividend SCHD provides a higher current dividend yield and better dividend growth than FUSD which has been going  lower recently due to capital appreciation, SCHD has historically grown better, however there arent many better alternatives in Europe and in general FUSD may be seen as more growth-oriented as well for the future.

Conclusion

So looking at the differences we identify the following

1. Expense Ratio: SCHD has a lower expense ratio of 0.06% compared to FUSD's expense ratio of 0.25%. This means that SCHD is a more cost-effective option and means we sacrifice more which could have meant a higher yield for FUSD.

2. Index Methodology: SCHD tracks the Dow Jones U.S. Dividend 100 Index, which includes 100 high-yielding US stocks with a consistent track record of dividend payments. FUSD ETF tracks the performance of the US Quality Income UCITS.

3. Sector Exposure: SCHD has a slightly different sector exposure and the top holdings when it comes to FUSD may be seen as more growth-oriented which may be better for the future.

4. Dividend Yield: SCHD has a higher dividend yield of 3.6% compared to FUSD's yield of 2%. This means that SCHD may be more attractive to income-seeking investors. SCHD is better as well in terms of historical dividend growth rate.

In the end, I think the allocation has all to do with the timeline and goal. I currently dont hold FUSD but rather its global counterpart FGQI as a way to enjoy the benefit over a longer term and to reach my target allocation in terms of growth and dividend. I like the allocations with SCHD and historical performance, as I have a longer time horizon I don't mind too much the current dividend yield being a bit lower, even though it is something that we lose with FUSD ETF and may be frustrating for investors seeking a higher current income. Overall, I like the fact that FUSD doesn't have such a high exposure to finance.

Disclaimer: I am not a financial advisor, this blog is centered around my opinion and should not be viewed as legal, professional, or financial advice. For me, it's crucial to supplement my knowledge with resources like videos, articles, and books to deepen my understanding of investing principles and strategies.

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