This ETF Has Crushed the S&P 500 in 2026. Here's Why I Think It Still Has Room to Grow.

Beating the S&P 500 is hard, but sometimes individual stocks or entire exchange-traded funds (ETFs) can do it. So far in 2026, this widely watched benchmark has been outperformed by the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). SCHD has delivered a year-to-date total return of about 23.4%, compared to 15.1% for the S&P 500.

SCHD Total Return Level data by YCharts

But is this recent market-beating return sustainable? It could be. Based on several major market trends, the Schwab U.S. Dividend Equity ETF is well-positioned to continue growing in 2027 and beyond. Let's look at what makes SCHD one of the best dividend ETFs -- and why it might keep beating the S&P 500.

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SCHD: 102 stocks, 3.32% dividend yield

The Schwab U.S. Dividend Equity ETF is a low-cost index fund (0.06% expense ratio) that holds a targeted portfolio of 102 stocks. It tracks the Dow Jones U.S. Dividend 100 index, which comprises companies that are financially strong and capable of paying high-quality, sustainable dividends over time.

Since the fund's inception in October 2011, SCHD has delivered average annual returns of 13.11%. In the past three years, it's done even better, with a 15.44% annualized return (net asset value). And last year it delivered a total return of about 23.4%.

This fund is a great choice for passive income from dividends. As of this writing, SCHD is paying a 30-day SEC yield of 3.32%, and it paid a trailing-12-month yield of 3%. Few other dividend index funds can beat that payout.

But alongside the great dividends, here are two other big-picture reasons SCHD could be a good buy for future gains.

1. Higher interest rates are less risky for financially strong companies

The Federal Reserve hiked interest rates in September, bond yields are rising, and some investors fear we could be entering an environment of higher-for-longer interest rates. If interest rates stay high, that could be bad news for companies with lower credit ratings that have to pay more to borrow.

Fortunately for SCHD shareholders, the stocks of this dividend ETF tend to have strong balance sheets. The fact that they pay such high dividends is a sign that these companies tend to have plenty of cash on hand and don't carry too much debt. That means these stocks are unlikely to be derailed by higher interest rates.

2. Dividend stocks like SCHD might be (relatively) safe from an AI bubble

Another major risk facing the S&P 500 right now is the recent surge in the artificial intelligence (AI) trade. AI stocks and megacap tech names have gotten so big that they've turned the S&P 500 into a concentrated bet on AI. About 40% of the S&P 500 is made up of the technology sector. That's all fine and good when tech stocks are booming, but what if AI turns out to be a bubble that bursts?

If so, investors in the Schwab U.S. Dividend Equity ETF might be relatively safe. This dividend ETF is not as tech-heavy as the S&P 500. The top sector holdings in SCHD are healthcare (20.7% of the fund), consumer staples (20.4%), and energy (14.1%). Information technology ranks a distant sixth, with only 9.2% of the fund's assets.

Are you worried about an AI bubble? If so, SCHD could put your money to work in some totally different parts of the economy that might be safe from a tech stock sell-off. Here's how SCHD performed in 2022 during the most recent bear market -- the tech-heavy Nasdaq-100 index declined by 32%, and the S&P 500 dropped by 18%, but SCHD was only down by about 3%.

SCHD Total Return Level data by YCharts

There's no guarantee that any stock, sector, or ETF type will be "safe" in the next bear market. But this track record of solid performance is another reason why SCHD is one of the best dividend index funds.

Ben Gran has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.