How This Popular ETF Went From Laggard to Top 1% in Its Category

Any investors in the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) who were able to ride out the rough years from 2023 to 2025 are finally being rewarded.

This ETF has grown to become the second largest dividend exchange-traded fund (ETF) in the world with assets of more than $85 billion. It got to that point on the heels of eight consecutive years of performing in the top one-third of Morningstar's Large Value category. It even managed to keep pace with the S&P 500, a rarity for dividend ETFs in a tech-driven market.

Over the past few years, however, it all fell apart.

Megacap tech and artificial intelligence (AI) stocks drove the major indexes higher, but the Schwab U.S. Dividend Equity ETF underperformed badly even within its peer group. Overweights to lagging sectors, especially energy and consumer staples, led to three straight years of bottom-quartile performance, including performing in the bottom 2% in 2025.

In 2026, however, it made a huge comeback. This year, it's in the top 1% of its Morningstar category and is the top-performing U.S. dividend ETF in the entire marketplace.

How has the fund done it? Let's break down the portfolio to see what's driving performance.

Image source: Getty Images.

Nearly 40% of the fund is in energy, consumer staples

If you look at the Schwab U.S. Dividend Equity ETF's positioning in 2026, it's about as perfect a match for what's working in the market right now as you'll find.

Case in point, the fund's two biggest sector allocations are energy (20%) and consumer staples (19%). Of more than 100 U.S. dividend ETFs, only four have a higher allocation to energy. Only a dozen or so have more invested in consumer staples. Almost no ETF in this universe has a larger combined allocation to these two sectors.

Energy is up about 27% this year, while consumer staples have gained 15%. These sectors have easily been the biggest drivers of returns for this fund.

Deep value tilt

It's hard to call a fund with a price-to-earnings ratio of 18 a value fund. But considering that the Schwab U.S. Large Cap ETF has a P/E of 28, it definitely qualifies.

The Vanguard Value ETF is outperforming the Vanguard Growth ETF by more than 13% year to date. That big value tilt is finally paying off.

The three worst-performing sectors are the fund's biggest underweights

The four worst-performing sectors year to date are financials, technology, consumer discretionary, and communication services. What are this ETF's four biggest underweights relative to the S&P 500? Financials, technology, consumer discretionary, and communication services. Combine this with the big overweights mentioned above, and this fund could not be better positioned to take advantage of what's in favor right now.

Overall, the Schwab U.S. Dividend Equity ETF's strength lies in its focus on large, financially healthy, cash-generating companies. In times of market stress and worry, those are the stocks that tend to rise to the top. This fund has always executed a top-tier strategy. It's great to see it finally getting rewarded once again.

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