Own VOO and SCHD? Here's How Much You're Really Diversifying.
Key Points
A lot of investors mistakenly assume that having a bunch of funds in their portfolios makes them diversified.
Whether it's actually diversified depends on which funds you're pairing up.
The Vanguard S&P 500 ETF (VOO) and the Schwab U.S. Dividend Equity ETF (SCHD) are ideal partners.
Owning both the Vanguard S&P 500 ETF (NYSEMKT: VOO) and the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) has become a popular investment strategy.
The S&P 500 gives you broad exposure to the largest U.S. companies, while the Schwab ETF targets high-quality, high-yielding dividend growth stocks. On paper, they look like an ideal pairing.
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But investors shouldn't assume that more exchange-traded funds (ETFs) mean greater diversification. It all depends on how unique those funds really are.
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VOO and SCHD have a surprising lack of overlap
The Vanguard S&P 500 ETF owns, as the name suggests, roughly 500 companies. The Schwab U.S. Dividend Equity ETF holds a more concentrated portfolio of 103 stocks.
But despite the fact that these two funds target U.S. large-cap stocks, there's not nearly as much overlap as you might think.
Currently, only about half of Schwab U.S. Dividend Equity ETF's positions are currently in the S&P 500. That's due in large part to its higher weighting in mid- and smaller-size companies, especially on the value side. Because the fund has a value tilt relative to the S&P 500, which is more heavily weighted toward growth, there's only an 8% overlap in terms of portfolio weight.
From that standpoint, they're strong diversification candidates. But their respective sector mixes make the case for diversification even stronger.
The Vanguard S&P 500 ETF's top sector holdings are tech (37%), financials (13%), communication services (10%), and consumer discretionary (9%). This reflects the index's heavy growth tilt driven by the artificial intelligence (AI) trade.
The Schwab U.S. Dividend Equity ETF's top sector holdings include healthcare (21%), consumer staples (20%), energy (14%), industrials (12%), and financials (10%). Outside of the latter category, these lists are completely unique.
Would I own VOO and SCHD together?
I already do!
At a high level, the Vanguard S&P 500 ETF is a large-cap growth fund tilting heavily toward megacaps. The Schwab U.S. Dividend Equity ETF is a large- and mid-cap value fund.
That makes them ideal partners. One targets long-term growth. The other provides a more defensive dividend income portfolio. A lot of people want to pair an S&P 500 fund with something like the Vanguard Growth ETF (NYSEMKT: VUG) or the Vanguard Information Technology ETF (NYSEMKT: VGT). But combining VOO and SCHD is what smart portfolio construction is all about.
For long-term growth, both funds can serve as cornerstones of the portfolio. And they work very well together.
David Dierking has positions in Schwab U.S. Dividend Equity ETF and Vanguard Information Technology ETF. The Motley Fool has positions in and recommends Vanguard Morningstar Growth ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.