Analysts Downgrade Schwab U.S. Dividend Equity ETF to 'Hold'

Analysts at PropNotes have downgraded the Schwab U.S. Dividend Equity ETF (SCHD), a significant fund with $71.22 billion in assets under management, to a 'Hold' rating. This decision, announced on September 27, 2025, marks a notable shift in expert opinion for an ETF previously regarded as a 'gold standard' in the dividend income space.

The Downgrade in Detail

PropNotes cited SCHD's 'persistent underperformance since the AI-driven market shift in 2022' as the primary catalyst for the downgrade. A key factor highlighted is SCHD's limited exposure to the 'Mag 7' growth stocks, which have been significant drivers of recent market gains. This lack of alignment with the prevailing market trend has resulted in a 'significant lag versus the S&P 500 post-ChatGPT.'

Prior to 2022, from its inception in 2011, SCHD was lauded for its ability to deliver strong total returns and consistent dividend yields. However, its recent performance, characterized by 'recent drawdowns and weak rebounds,' has raised concerns among analysts regarding its capacity to generate robust total returns in the current environment. Consequently, PropNotes has advised investors to 'stay on the sidelines for now,' explicitly stating that they are 'not allocating new capital to SCHD.'

Market Shift and Performance Disparity

The downgrade of SCHD reflects a broader market sentiment shift away from traditional dividend value strategies towards AI-driven growth. The year 2022 marked a significant market regime change, rewarding growth companies, particularly those in the technology sector, over conventional dividend payers. This is evident in the performance disparity observed in 2025; as of early Q3, the S&P 500 has delivered a Total Return of 12.33%, while SCHD's Total Return has been a comparatively modest 2.90%.

SCHD's systematic asset selection process, which emphasizes quality, yield, and lower concentration risk, typically leads to a portfolio composition distinct from growth-focused indices. As of June 30, its portfolio was heavily weighted towards the energy sector (19.2%), consumer staples (18.8%), and healthcare (15.5%), with a more modest 9% allocation to information technology. This contrasts sharply with the S&P 500, where the 'Magnificent 7' companies alone are projected to contribute 25% of total index earnings and account for 34.3% of its total market capitalization in 2025.

Broader Context: The AI-Driven Market

The dominance of AI-driven growth themes continues to shape market leadership. For the 'Mag 7' group, Q3 2025 earnings are expected to increase by 12.2% year-over-year on 14.6% higher revenues. Excluding these seven companies, the remaining S&P 500 constituents are forecast to grow earnings by 6.8% in 2025. This bifurcation underscores the significant influence of the AI revolution on overall market performance and investor preferences.

Despite its recent struggles, SCHD maintains attractive characteristics for income-focused investors. It offers a trailing twelve-month dividend yield of approximately 3.8% and a 5-Year Dividend Growth Rate (CAGR) of 10.87%. Its current composition, featuring holdings like AbbVie, Chevron, and Home Depot, aims for sustainable dividends. The ETF's Price-to-Earnings (P/E) ratio of under 14x remains well below the S&P 500's 22x multiple and the 'Mag 7's' 28x multiple, suggesting a potentially safer harbor for investors anticipating a rotation back to value.

Investor Sentiment and Future Outlook

The prevailing market sentiment for SCHD is currently uncertain to bearish, reflecting the broader shift towards AI-driven growth. While PropNotes recommends caution, some analysts suggest that the 'froth has built up in AI growth themes' and that a rotation from growth to value could favor SCHD. They argue that SCHD's high-quality holdings and lower tech exposure provide resilience against a potential digestion of the tech rally, especially with attractive valuations and potential future interest rate cuts.

"While SCHD continues to offer quality, yield, and lower concentration risk, recent drawdowns and weak rebounds raise concerns about its ability to deliver strong total returns in the current market environment."

This perspective highlights the ongoing debate between growth and value investing in a market heavily influenced by technological innovation and macroeconomic factors, including the Federal Reserve's recent 25 basis point rate cut and indications of further reductions.

Looking Ahead

Investors will closely monitor several key factors in the coming weeks and months. The sustainability of the AI-driven market rally, particularly the performance of the 'Mag 7' stocks, will be crucial. Any signs of a market rotation from growth to value could impact SCHD's trajectory. Additionally, further actions by the Federal Reserve regarding interest rates could influence the attractiveness of dividend-paying assets. The ongoing dynamics between aggressive growth strategies and stable dividend income will continue to define investment decisions in the evolving market landscape.