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Slightly Bullish +16

SCHD ETF reconstitution is here: what next for the dividend fund?

🔄 The Schwab US Dividend Equity ETF (SCHD) is undergoing its annual reconstitution process effective Monday morning.

📉 SCHD stock price has retreated from a year-to-date high of $32 to the current level of $30.4 ahead of changes.

➖ Cisco Systems, holding over 46 million shares worth $3.6 billion, is being removed as the largest name leaving the fund.

💊 AbbVie, valued at over $3.2 billion in holdings, is also exiting the ETF despite being a top healthcare player.

⚠️ Additional exits include Valero Energy, Halliburton, Packaging Corp of America, CF Industries, Amcor, LyondellBasell, and Unum Group.

🏢 Janus Henderson is removed after its acquisition by Trian Fund Management and General Catalyst for over $7.4 billion.

➕ Approximately 26 new companies are being added to the fund following the removals.

💼 Major alternative asset managers Blackstone (AUM: $1.3T) and Ares Management (AUM: ~$600B) will join the ETF.

📉 Despite recent drops of 41% and 45% respectively, private credit struggles may make these additions seen as bargains by SCHD.

🏥 Other notable new entrants include UnitedHealth, Abbott Laboratories, Procter & Gamble, Accenture, Comcast, ADP, Devon Energy.

🛍️ The incoming list also features Booz Allen Hamilton, Principal Financial Group, Macy's, and Old Republic Insurance.

⚖️ SCHD has outperformed the broader market this year, gaining 10% while the S&P 500 Index declined nearly 5%.

💰 The fund has seen over $19 billion in net inflows recently as investors rotate from growth stocks to value assets.

📉 Major technology companies have underperformed, with NVIDIA down 18.5%, Palantir down 28%, and Adobe/Microsoft/ServiceNow plunging.

⛽ Energy companies like ConocoPhillips, Chevron, EOG Resources, SLB, ONEOK, and APA remain key holdings representing a 20% stake.

💵 Crude oil and natural gas price jumps are helping the energy sector within SCHD perform well against tech weakness.

🏗️ The ETF maintains a diversified exposure to consumer staples, healthcare, industrials, and financials alongside defense sectors.

📊 SCHD currently trades at a P/E ratio of 20 compared to the S&P 500's P/E of 23, positioning it as a potential bargain.

Bullish Signals
  • The SCHD ETF continues to outperform the broader market, rising 10% this year while the S&P 500 Index dropped nearly 5%, demonstrating its defensive value and resilience.
  • The fund has attracted over $19 billion in investor inflows as capital rotates from growth stocks to undervalued dividend payers, indicating strong investor confidence.
  • New additions include highly liquid alternative asset giants Blackstone ($1.3 trillion AUM) and Ares Management ($600 billion AUM), potentially providing upside potential as private credit woes subside.
  • The portfolio gains exposure to top-tier stable companies like UnitedHealth, Abbott Laboratories, Procter & Gamble, and Accenture, which offer reliable cash flows.
  • The fund maintains a strong energy sector allocation of approximately 20%, benefiting from rising crude oil and natural gas prices from names like ConocoPhillips and Chevron.
  • SCHD trades at an attractive price-to-earnings ratio of 20, which is lower than the S&P 500 Index multiple of 23, suggesting it is a bargain relative to the broader market.
Risk Factors
  • Major names will be removed from the SCHD ETF including Cisco Systems (worth $3.6 billion) and AbbVie (worth $3.2 billion), altering the fund's portfolio composition.
  • The fund is dropping several other significant companies such as Amcor, Valero Energy, Halliburton, and CF Industries to make room for new holdings.
  • Ares Management, a notable incoming position, has already slumped by 45% from its highest point this year due to woes in the private credit industry.
  • Blackstone, another major addition with over $1.3 trillion in assets, has dropped by 41% from its peak this year as it faces similar industry challenges.
  • The incoming additions are driven by recent poor performance of alternative asset managers, raising questions about whether these companies are truly undervalued bargains or carry hidden distress risks.
  • Despite the reconstitution, the broader market and technology sector are underperforming; for instance, NVIDIA has dropped 18.5% from its highest point last year.
  • The fund's recent performance relies heavily on energy holdings which constitute 20% of the portfolio, creating potential concentration risk if oil prices fluctuate.
Full Analysis
The Schwab US Dividend Equity ETF (SCHD) is undergoing a significant quarterly reconstitution as it nears its annual rebalance. On Friday, the fund identified major changes that will take effect when markets open on Monday, driven by a pullback in SCHD stock prices from a year-to-date high of $32 down to roughly $30.4. This shift involves removing approximately 26 companies and adding new ones based on recent performance criteria. The largest exit is Cisco Systems, which represented over $3.6 billion in holdings, followed by AbbVie with holdings worth $3.2 billion. Several other names are being removed including Valero Energy, Halliburton, CF Industries, LyondellBasell, Unum Group, and Signet Jewelers. Additionally, Janus Henderson is being exited as it prepares for its acquisition by Trian Fund Management in a deal valued over $7.4 billion, alongside smaller additions like International Bancshares and Radian Group. Incoming to the fund are notable additions including Ares Management and Blackstone, two of the largest alternative asset managers which recently faced significant challenges in the private credit sector. Blackstone’s stock dropped 41% from its yearly high while Ares Management fell 45%, suggesting the fund sees them as bargains at current valuations. Other new entrants include UnitedHealth Group, Abbott Laboratories, Procter & Gamble, Accenture, Comcast, ADP, Devon Energy, Booz Allen Hamilton, Principal Financial Group, Macy’s, and Old Republic Insurance. The fund now holds about 20% in energy, with positions in ConocoPhillips, Chevron, EOG Resources, SLB, ONEOK, and APA benefiting from rising crude oil and natural gas prices. The reconstitution occurs against a backdrop where SCHD has outperformed the broader S&P 500 Index this year, gaining roughly 10% while the benchmark dropped nearly 5%. This performance is partly attributed to a rotation into value stocks as technology-heavy indices underperform. While companies like NVIDIA have declined by 18.5% from their peaks and Palantir has fallen 28%, the SCHD ETF maintained resilience due to its sector diversification and defensive holdings in consumer staples, healthcare, industrials, and financials. The fund currently trades at a price-to-earnings multiple of 20, compared to an S&P 500 average of 23, with over $98 billion in assets under management and significant inflows exceeding $19 billion recently as investors continue to favor value over growth strategies.