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Dear SCHD investors, avoid SCHG and buy MOAT ETF instead

By: Invezz
Wall Street With United States Flag

The Schwab US Dividend Equity (SCHD) ETF is one of the most popular funds in the market, thanks to its high yield and a strong track record of dividend growth. Over the years, it has grown and attracted over $47 billion in assets.

In a recent article, I recommended that SCHD investors should also allocate some cash to dividend growth ETFs like the iShares Core Dividend Growth (DGRO) and Vanguard Dividend Appreciation Fund (VIG). And on Friday, I also recommended buying the Pacer Cash Cows 100 ETF (COWZ).

These three ETFs have unique characteristics that can complement the SCHD fund. For example, COWZ invests in companies with a proven record of growing their free cash flow (FCF), the most important number watched by most investors.

VanEck Morningstar Wide Moat ETF is another alternative

A key concern for the Schwab US Dividend Equity ETF is that it lacks technology companies in its portfolio. As a result, it tends to underperform other large funds like Invesco QQQ and SPDR S&P 500 ETF (SPY). 

One alternative would be to invest in Schwab US Large-Cap Growth ETF (SCHG), which tracks big companies with a record of revenue growth. My concern with this fund is that it is extremely exposed to the tech sector. Information technology companies account for 45.46% of the fund, with Apple and Microsoft accounting for ~24% of the fund. This makes it a high-risk fund if tech stocks plunge.

Therefore, the MOAT ETF by VanEck seems like a good alternative. For one, the fund invests in quality companies that have a substantial moat in their key industries. Its sector breakdown is also more balanced, with tech stocks having a 21.6% share. Tech is followed by health care, financials, industrials, and consumer discretionary. 


MOAT industries

Unlike SCHG, no single company accounts for over 10% of the fund. Comcast, its biggest constituent, has a 2.74% share of the fund. Other top companies in the MOAT ETF are Alphabet, Tyler Technologies, Gilead Sciences, Wells Fargo, and Intercontinental Exchange (ICE).

All these funds have a moat in their industries. Alphabet is the biggest player in digital marketing while Tyler Technologies has a moat in public sector software. Gilead is a major player in key illnesses like HIV while ICE owns the biggest six clearing houses and the NYSE.

MOAT performance

A key thing to look when investing in an ETF is its historic performance. While past performance is not a good indicator of future performance, it can help you gauge a fund’s quality. The MOAT ETF has jumped by more than 270% since its inception in 2012.

Most importantly, the MOAT ETF has outperformed the S&P 500 index. Its average annual returns per year since inception is 14.33 compared to S&P 500’s 13.1%. Its dividend income has also been growing. Its annual distribution has jumped from $0.13 in 2012 to $0.82. Therefore, I believe that SCHD investors should buy MOAT, which I believe is a Buffett-styled ETF.

The post Dear SCHD investors, avoid SCHG and buy MOAT ETF instead appeared first on Invezz.

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