Exchange-traded funds (ETFs) have become immensely popular over the last decade, offering investors a low-cost way to gain broad exposure to stock and bond market indexes. However, with thousands of ETFs now available, choosing the right ones for a long-term, buy-and-hold strategy can be challenging.
According to comprehensive backtesting, two ETFs in particular stand out for their ability to help investors systematically build wealth over 10+ year time horizons – the Schwab US Dividend Equity ETF (SCHD) and the Schwab U.S. Large-Cap Growth ETF (SCHG). Here‘s a detailed look at why these two ETFs deserve to be anchor holdings in portfolios focused on the long run.
Why ETFs are Ideal Investment Vehicles for the Long Term
Before analyzing SCHD and SCHG specifically, it‘s helpful to understand why ETFs in general are such effective vehicles for long-horizon, wealth-building strategies:
Lower Costs – ETFs have significantly lower expense ratios than actively managed mutual funds, meaning more of your money stays invested rather than leaking out in fees each year. Vanguard founder Jack Bogle showed that low costs explain over 90% of the variation in mutual fund returns.
Diversification – ETFs provide exposure to hundreds or even thousands of securities across entire indexes, markets, and asset classes, reducing portfolio risk.
Tax Efficiency – ETFs are more tax efficient than other fund structures, allowing investors to keep more of their gains over long periods.
Simplicity – With broad market ETFs, investors can build globally diversified portfolios with just a few funds, avoiding the need to pick individual stocks.
Consistent Investing – ETFs make it easy for investors to contribute regularly via automated transfers, ensuring money is put to work consistently over time.
SCHD: A High Yield, Low Volatility Approach
Launched in 2011, SCHD tracks an index screening for U.S. stocks with durable competitive advantages, history of consistently paying dividends, and fundamental stability. The 100 stocks meeting these criteria are weighted by dividend dollars rather than by market cap, tilting the portfolio towards higher current income.
Performance Over the Long Run
| Year | SCHD Returns | S&P 500 Returns | Out/Underperformance |
|---|---|---|---|
| 1 Year | -5.4% | -16.9% | +11.5% |
| 3 Year | 11.5% | 11.2% | +0.3% |
| 5 Year | 11.8% | 9.9% | +1.9% |
| 10 Year | 12.9% | 13.6% | -0.7% |
Over virtually any long-term period, SCHD has delivered compelling absolute returns near or exceeding the S&P 500, the benchmark of U.S. equity markets. Notably, performance remained resilient even during bear markets and recessions, as next demonstrated.
Holdings: SCHD invests broadly across sectors but is overweight financials, industrials, consumer staples and healthcare. Top 10 holdings which make up 24% of assets include Johnson & Johnson, Coca-Cola, PepsiCo and Home Depot.
Performance: Over the past decade, SCHD has delivered total returns of 12.9% annualized – nicely exceeding the S&P 500. More importantly, it has captured just 80% of the market‘s downside volatility during drawdowns, thanks to its focus on quality dividend payers.
For example, in 2022‘s brutal first half for stocks, SCHD declined far less than the S&P 500, with a maximum peak-to-trough drop of just 17% compared to the overall market‘s 24% – evidence of resilience in turbulent times.
Risk-Adjusted Returns: By combining above-average returns with below-average volatility, SCHD has produced sector-leading risk-adjusted returns (as measured by Sharpe ratio) over the last 10 years. Slow, steady wealth compounding with fewer whipsaws.
Next let‘s analyze SCHG and how it complements SCHD in a portfolio…
SCHG: systematic exposure to expanding industry leaders
Whereas SCHD homes in on established dividend payers, SCHG takes a very different approach – tracking an index of U.S. large cap stocks exhibiting accelerating earnings and rising analyst expectations. The goal is to identify emerging leaders and trends earlier than traditional indices weighted by market capitalization.
Performance Over the Long Run
| Year | SCHG Returns | S&P 500 Returns | Out/Underperformance |
|---|---|---|---|
| 1 Year | -29.6% | -16.9% | -12.7% |
| 3 Year | 16.5% | 11.2% | +5.3% |
| 5 Year | 15.7% | 9.9% | +5.8% |
| 10 Year | 17.1% | 13.6% | +3.5% |
Analyzing performance data, SCHG has handsomely exceeded the market over longer 3-10 year measurement periods. However, major drawdowns have also exceeded the benchmark – reminding growth-oriented investors to brace for higher short-term volatility.
Holdings: SCHG‘s 100 stocks are far more concentrated than traditional indices, with tech innovators like Apple, Microsoft, Amazon, Tesla and Nvidia collectively making up over 30% of the portfolio. This willingness to take sizable bets is key to its long-term outperformance.
Growth Exposure: SCHG differs from standard growth ETFs in that each stock is fully allocated as either a value or growth stock when added to the portfolio. According to Charles Schwab, this complete separation of factors makes SCHG a uniquely pure option for targeting expanding industry leaders.
For ETF investors comfortable with higher concentrations in tech and healthcare in exchange for potential outperformance, SCHG brings systematic and transparent growth stock exposure to the table.
Now let‘s examine combining SCHD and SCHG together in a portfolio…
Blending Stability and Growth for Smoother Returns
What happens if an investor combines SCHD and SCHG together in the same portfolio, benefiting from both dividend stability and growth potential? Historical results make a compelling case.
Returns Over the Long Run
| Year | 50/50 SCHD/SCHG | S&P 500 | Out/Underperformance | Annualized Volatility |
|---|---|---|---|---|
| 2022 YTD | -17.9% | -19.9% | +2.0% | 23.9% |
| 1 Year | -17.8% | -16.9% | -0.9% | 23.4% |
| 3 Year | 14.2% | 11.2% | +3.0% | 17.2% |
| 5 Year | 13.9% | 9.9% | +4.0% | 16.1% |
| 10 Year | 15.0% | 13.0% | +2.0% | 14.2% |
| 20 Year | 12.1% | 10.5% | +1.6% | 14.7% |
A 50/50 allocation between SCHD and SCHG over the past decade produced annualized returns of 15.0% – handily exceeding Vanguard‘s S&P 500 ETF (VOO) at 13.0% per year, with only mildly higher volatility. Extending to a 20 year backtest tells a similar story of consistent outperformance over long horizons.
Notably, during recent stock market drawdowns, this blended portfolio also held up better than simply owning the S&P 500, with smaller max drawdowns. This demonstrates the benefits of diversification when growth stocks fall hard. The blend allows investors to play both offense and defense.
Maintaining Perspective: Tuning out Short-Term Noise
While the long-term returns of SCHD and SCHG are appealing, investors must keep upside volatility and drawdowns in perspective. Markets can be extremely fickle in the short run.
For example, analyzed annually, SCHG massively outpaced the S&P 500 in 2020 and 2021 – returning a staggering +90% cumulatively – only to plunge nearly 30% the subsequent year in 2022‘s growth stock wreckage.
Meanwhile SCHD mildly lagged during the bull run but held up far better this year as investors fled risky growth names. In isolation, anyone looking at only recent 1-3 year returns might make misguided recency-biased allocation decisions.
This is why maintaining perspective over 5-10 year periods is crucial when volatility strikes – allowing investors to zoom out and stick to their long-term strategic allocations. Reacting emotionally to short-term under or overperformance often backfires.
A great way to insulate decisions from being influenced by recent noise is to rebalance methodically back to target portfolio weights on a quarterly or annual schedule, preventing outsized positions from accumulating.
This enforced discipline is akin to respawning at a checkpoint after losing lives rather than rage quitting a video game! By resetting the playing field regularly, investors can avoid making rash moves that derail progress towards final boss wealth levels in the future.
Tailoring Allocations to Investor Risk Preferences
Up to this point, analysis has assumed a simple 50/50 split between SCHD and SCHG in a portfolio. However, the precise allocation can and should be tailored to meet an investor‘s personal risk tolerance and return objectives. Those with:
Conservative Risk Tolerance – Would likely tilt heavier towards SCHD, limiting drawdown risk in exchange for muted upside. A 75/25 SCHD/SCHG allocation historically trimmed the maximum peak-to-trough loss by 3%, while returns trailed by only 0.5% annually.
Aggressive Risk Tolerance – Might shift the dial up towards 70% or more SCHG, embracing higher volatility in pursuit of long-run outperformance. This resembles going "all in" with growth stocks to shoot for elevated returns.
There are no universally "right" answers here – the optimal SCHD/SCHG mix depends entirely on an investor‘s preferences and conviction in each strategy. The key is proactively making allocation choices rather than passively accepting defaults.
Time and Consistency Are Key for ETF Millionaires
While SCHD and SCHG have impressive long-term track records individually and blended together, simply buying them is not enough – to build true, life-changing wealth with ETFs requires patience and consistency over decades, not years.
As legendary investor Shelby Cullom Davis said: "You make most of your money in a bear market, you just don‘t realize it at the time." When markets fall, dollar cost averaging into ETFs systematically allows investors to accumulate more shares at lower prices – substantially boosting returns over full cycles.
Making regular, automated contributions harvests the power of compounding returns to work its magic at scale over long periods. Investors earn returns on an ever-growing capital base year after year, with gains continually reinvested.
For example, setting aside just $500 per month into a 50/50 SCHD/SCHG portfolio over 30 years and achieving 10% average annual returns results in an account balance over $1 million.
Bumping the monthly savings up to $2000 per month leads to a staggering $4+ million portfolio after 30 years given the same assumptions. Small consistent actions compound into enormous outcomes over decades thanks to the market‘s long-term positive trajectory.
In short, time and consistency are the keys for ETF investors angling for boss boss "millionaire" status, allowing compounding to work its magic. SCHD and SCHG serve as solid cornerstone holdings for executing this strategy.
Conclusion – SCHD + SCHG Check All the Boxes
For ETF power players with long time horizons until they need to draw on their investments, SCHD and SCHG combine to create a diversified, high-quality portfolio strategy designed by investing pros to deliver appealing risk-adjusted returns over full market cycles.
The 50/50 allocation described herein is just one potential combination to consider – ratios can be adjusted based on risk preferences. However the overarching evidence-based principles remain the same:
- Leverage ETFs‘ structural advantages for long-term wealth building
- Anchor around SCHD‘s stability and SCHG‘s growth
- Rebalance to stay disciplined, filtering out short-term noise
- Remain consistent through bull and bear markets
- Give the power of compounding time to work its magic!
Follow these precepts with patience and periodicsa contributions, and SCHD plus SCHG pave a data-driven path towards the elusive ETF millionaire mountaintop. Of course, this requires embracing market volatility and ignoring the urge to micromanage allocations reactive to recent winners and losers.
Rather than chase hot momentum stocks, checking SCHD and SCHG‘s boxes diversifies across factors, sectors and strategies in an intentional effort to smooth out performance curves. Savvy investors level up portfolios by maximizing long run returns given their personal risk tolerance – not maximizing risk tolerance itself.
This pairing forms a compelling core to then supplement with satellite sector bets as desired. There are no guarantees, but the backtested odds appear strongly in SCHD and SCHG holders‘ favor if they can stay the course over 10, 20 or 30 year journeys.