Own VOO and SCHD? Here's How Much You're Really Diversifying.
Key Points
A lot of investors mistakenly assume that having a bunch of funds in their portfolios makes them diversified.
Whether it's actually diversified depends on which funds you're pairing up.
The Vanguard S&P 500 ETF (VOO) and the Schwab U.S. Dividend Equity ETF (SCHD) are ideal partners.
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Owning both the Vanguard S&P 500 ETF (NYSEMKT: VOO) and the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) has become a popular investment strategy.
The S&P 500 gives you broad exposure to the largest U.S. companies, while the Schwab ETF targets high-quality, high-yielding dividend growth stocks. On paper, they look like an ideal pairing.
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But investors shouldn't assume that more exchange-traded funds (ETFs) mean greater diversification. It all depends on how unique those funds really are.
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VOO and SCHD have a surprising lack of overlap
The Vanguard S&P 500 ETF owns, as the name suggests, roughly 500 companies. The Schwab U.S. Dividend Equity ETF holds a more concentrated portfolio of 103 stocks.
But despite the fact that these two funds target U.S. large-cap stocks, there's not nearly as much overlap as you might think.
Currently, only about half of Schwab U.S. Dividend Equity ETF's positions are currently in the S&P 500. That's due in large part to its higher weighting in mid- and smaller-size companies, especially on the value side. Because the fund has a value tilt relative to the S&P 500, which is more heavily weighted toward growth, there's only an 8% overlap in terms of portfolio weight.
From that standpoint, they're strong diversification candidates. But their respective sector mixes make the case for diversification even stronger.
The Vanguard S&P 500 ETF's top sector holdings are tech (37%), financials (13%), communication services (10%), and consumer discretionary (9%). This reflects the index's heavy growth tilt driven by the artificial intelligence (AI) trade.
The Schwab U.S. Dividend Equity ETF's top sector holdings include healthcare (21%), consumer staples (20%), energy (14%), industrials (12%), and financials (10%). Outside of the latter category, these lists are completely unique.
Would I own VOO and SCHD together?
I already do!
At a high level, the Vanguard S&P 500 ETF is a large-cap growth fund tilting heavily toward megacaps. The Schwab U.S. Dividend Equity ETF is a large- and mid-cap value fund.
That makes them ideal partners. One targets long-term growth. The other provides a more defensive dividend income portfolio. A lot of people want to pair an S&P 500 fund with something like the Vanguard Growth ETF (NYSEMKT: VUG) or the Vanguard Information Technology ETF (NYSEMKT: VGT). But combining VOO and SCHD is what smart portfolio construction is all about.
For long-term growth, both funds can serve as cornerstones of the portfolio. And they work very well together.
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David Dierking has positions in Schwab U.S. Dividend Equity ETF and Vanguard Information Technology ETF. The Motley Fool has positions in and recommends Vanguard Morningstar Growth ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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