Growth Stocks Are Getting Riskier. This ETF Historically Holds Up Better

Since the end of the 2022 bear market up through 2025, growth stocks had a nearly uninterrupted run of outperformance relative to the S&P 500. On the heels of the artificial intelligence (AI) boom and the "Magnificent Seven" stocks, growth has been one of the market's winningest themes.

That has changed in 2026. The Vanguard Growth ETF, one of the most successful exchange-traded funds (ETFs) over the past three years, is down 7% year to date (at the time of this writing). That lags the Vanguard S&P 500 ETF's 3% loss, but it significantly lags the near-1% gain of the Invesco S&P 500 Equal Weight ETF.

The list of factors suggesting that growth's run might be over is growing. Labor market growth has nearly ground to a standstill. Inflation is still hovering close to 3% and may prevent the Federal Reserve from cutting rates further for the foreseeable future. Rising debt levels and consumer affordability issues are still threatening to derail economic growth forecasts.

It may be time to seek out safer paths for equity market returns.

Image source: Getty Images.

The Schwab U.S. Dividend Equity ETF makes sense in today's market

When the markets grow uncertain and volatility starts to tick higher, it makes sense to focus on financially sound companies. These are the ones backed by healthy cash flows, strong balance sheets, and lower debt levels. These companies tend to be more durable and able to withstand economic slowdowns.

Few ETFs focus on quality better than the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). Not only does it consider factors such as cash-flow-to-debt ratio and return on equity, but it also requires companies to have paid dividends for at least 10 years while considering dividend yield and dividend growth rate.

It's a strategy that I really like because it uses these screens to act as a cross-check against each other. The strategy looks at historical dividend growth rates, but makes sure the company has the cash to keep growing the dividend in the future as well. The strategy looks at high yields, but makes sure the company has the balance sheet strength to sustain that yield. It's a strong way to get the best of all worlds while mitigating some of the potential risk that comes from focusing on just one thing.

This ETF's current top sector holdings are energy (20%), consumer staples (19%), healthcare (16%), and industrials (12%). Not only does that make the portfolio look a lot different from the S&P 500, but it also positions it right in the sweet spot of what the market is favoring at the moment. After three years of lagging performance, it's back in the top 1% of Morningstar's Large Value category, which encompasses undervalued funds focused on large-cap companies, for 2026.

A history of holding up in down markets

Thanks to its defensive nature, the Schwab U.S. Dividend Equity ETF often declines less than the S&P 500 in challenging markets.

For example, during the 2025 "Liberation Day" scare, this ETF fell by about 16% compared to a 23% correction in the Vanguard Growth ETF. During the 2022 bear market, it fell by 15% compared to a 35% plunge in the Vanguard fund. Each correction will be a little different, but this ETF is built to hold up more often than not.

Many investors focus on maximizing returns in bull markets. It's just as important to minimize losses in down markets. The Schwab U.S. Dividend Equity ETF has shown its ability to capture the best of both worlds.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Growth ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.