The Schwab US Dividend ETF (SCHD) got a lot of positive attention for how well it did in 2022 versus market cap weighted (MCW) S&P 500. According to Portfoliovisualizer, SCHD dropped 3.23% while MCW dropped 18.17%, essentially 1500 basis points of outperformance which is outstanding. From 2012 through 2022, SCHD had a CAGR of 13.51% versus 12.78% for MCW and a standard deviation that was lower by 59 basis points. So better performance and lower standard deviation? Should we all jump in?
This reminds me of something you see in just about every mutual fund profile you read in Barron's. Some fund had a very good year or even great and the 5 and 10 year numbers look very favorable compared to that fund's benchmark. Do you see the flaw yet? If the outperformance from the one great year is strong enough, it will move the needle on all of the long term performance numbers. 1500 basis points in one year, SCHD in 2022, is enough to influence the longer term results.
Going from 2012-2021, so excluding its lights out 2022 performance, shows SCHD had a CAGR of 15.34% versus 16.45 for MCW and the standard deviations were only two basis points apart favoring SCHD. So a little less return for essentially the same standard deviation. That's a little less compelling. It's not realistic to expect SCHD to ever outperform like that again. It might of course, but no one should expect it.
I'm not bagging on dividend funds. It's absolutely a valid factor. In going year by year since its 2012 inception, SCHD has outperformed MCW four times. Any reasonable factor strategy will have its time in the sun of outperformance, I don't find four years out of eleven to be noteworthy outperformance either way. Again, it is clearly a valid factor and I can't envision a scenario where people get hurt in something like SCHD or the various others that are similarly conservative (some are relatively aggressive so know the difference if this interests you).
Switching from MCW to SCHD now, after a great year is an example of chasing last year's winner that I have mentioned before. A more glaring example might be with iShares US Momentum ETF (MTUM). In 2015 it was up 8.93% versus 1.25 for MCW. In 2016 though, MTUM lagged MCW by 700 basis points. In 2020 MTUM was up 29.85% versus 18.37 for MCW then in 2021 MTUM lagged by 15.4 percentage points. Momentum is a valid factor but seems to be even more prone to lagging by a lot after outperforming by a lot.
Reiterating from the other day, I do believe there is a way to blend together two or three factors in such a way as to achieve a better risk adjusted result than MCW over the duration of a stock market cycle. When you dabble in factors, it is crucial to understand when they might lag or outperform and also to understand that any factor you can find will have periods where they lag, predictable or not. Just because some factor should outperform coming off some sort of large decline, that doesn't mean it will the next time. No factor can always be best or outperform.
I have no interest or intention of buying any of the funds mentioned personally or for clients.
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