VOO Vs. SCHD: Which ETF Is Right For You?

Forbes

03-06-2025

Market volatility continues to dominate headlines, but for seasoned market players, it's no longer as intimidating, thanks to the strategy comically dubbed the 'TACO' trades - short for "Trump Always Chickens Out.' This tongue-in-cheek acronym refers to Trump's pattern of threatening grandiose tariffs, only to dial back the policies later. Market participants have learned to navigate this uncertainty by buying the market dips in anticipation of policy reversal. Beyond tactical plays like the TACO trade, long-term strategies are also gaining renewed focus, particularly VOO, a low-cost, passive ETF that tracks the S&P 500 index - which by the way added 4% in the past month as of May 30, 2025.
VOO saw record inflows in April, and hauled in robust inflows in May as well.
VOO provides low-cost, diversified exposure to the U.S. equity market, for investors seeking broad market returns without the hassle of stock-picking. It seeks to track the performance of the S&P 500 Index, by using full replication technique.
The VOO ETF is a part of Warren Buffett's portfolio – a powerful endorsement of its long-term value. It is also now the world's biggest ETF, surpassing the SPY, with assets of $1.3 trillion vs. SPY's $598.84 billion.
Record inflows of $21 billion in April, combined with $12.69 billion in May, have raised VOO's year-to-date total inflows to more than $65 billion as of May 30. The record inflow into a core holding like VOO may suggest that long-term investors are still staying the course, buying the dips, despite tariff volatility. But SPY, which tracks the same index, hasn't been as fortunate as VOO. Although SPY saw a $2.2 billion inflow in April, it witnessed outflows of $4.66 billion in May bringing its YTD outflows to more than $31 billion.
VOO has long been favored by retail and do-it-yourself (DIY) investors, primarily due to its ultra-low expense ratio of 0.03%, compared to SPY's 0.095%. Another compelling factor is the endorsement of legendary investor Warren Buffett, who not only recommends low-cost S&P 500 index funds but also explicitly mentions Vanguard's S&P 500 fund in his will.
The oracle of Omaha once again proved his mettle by selling $143 billion worth of stocks last year, including sizable Berkshire Hathaway's stakes in Apple and Bank of America – long before market volatility set in. The timing couldn't have been better. His strong ethical compass was equally evident when he halted Berkshire's stock buybacks in the second half of last year, citing overvaluation. It is precisely this integrity that lends credence to Buffett's consistent advocacy for low-cost, broadly diversified index funds, reinforcing investor confidence in options like VOO.
While Berkshire Hathaway does hold a stake in SPY, it is VOO that features prominently in Buffett's estate planning. As Buffett states:
'My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife's benefit. My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions or individuals—who employ high-fee managers.'
This strong endorsement, combined with VOO's cost-efficiency, may be why investors increasingly prefer the Vanguard ETF over SPY for long-term wealth-building strategies.
VOO's open-ended fund structure offers the choice to automatically reinvest dividends, which is buying additional or fractional shares of VOO using dividend payouts. Dividend reinvestments help the portfolio grow over time and leverage the power of compounding. Here too it has an edge over SPY, which because of its unit investment trust structure, does not allow the ability to reinvest dividends automatically. However, it must be noted that dividend reinvestment in SPY is often facilitated at the brokerage level, although not within the fund itself. While this distinction may appear trivial, it is not. Charles Schwab highlights the power of reinvesting dividends and compounding with a million-dollar example: A hypothetical $100,000 invested in a S&P 500 index fund in 1990 would have exceeded $2.1 million by 2022-end had dividends been reinvested, but worth only $1.1 million in the absence of dividend reinvestment.
The Schwab U.S. Dividend Equity ETF (SCHD) offered by Charles Schwab, aims to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Dividend 100 Index, which includes stocks of 100 high dividend-yielding U.S. companies. SCHD is typically more resilient in a recession, because the index it tracks follows a rigorous methodology to include high-quality, financially sound companies with sustainable and growing dividends.
A peek into the underlying index will show that no single stock represents more than 4% of the index and no single sector may exceed 25% of the index. Each trading day, the index is reviewed: if the combined weight of stocks above 4% exceeds 22%, the index is rebalanced, with changes taking effect two days later. REITs are excluded entirely.
To qualify for the index, stocks must have paid dividends for at least 10 consecutive years, possess a float-adjusted market cap of at least $500 million, and maintain a three-month average daily trading volume (ADTV) of at least $2 million.
Eligible stocks are first ranked by indicated annual dividend (IAD) yield—an estimate of next-year dividends calculated by annualizing the most recent quarterly payout. The top 50% by IAD advance to the next round. Those remaining are then scored on four metrics (each converted into a rank): free cash flow to total debt (zero-debt firms rank highest), return on equity (negative-equity firms rank lowest), IAD yield, and five-year dividend growth. The 100 stocks with the best composite scores make it to the index.
SCHD, which tracks this index, has 61.75% of its portfolio represented by stocks with a market cap of $70 billion or more, and about 90% of its stocks have a market cap of $15 billion or more. Large cap stocks are usually more resilient to market fluctuations vs. smaller peers.
Both ETFs are diversified with more than 100 stocks. VOO is more diversified as it tracks 500+ stocks in the S&P 500, offering broad market exposure, while SCHD holds about 103 stocks, focusing on companies with consistent dividends and financial strength.
In absolute dollar terms, VOO pays a higher annual dividend of $6.97 per share vs. SCHD's split-adjusted $1.04. However, SCHD offers a 3x-higher TTM dividend yield of 4%, versus VOO's 1.3%. This means SCHD generates more income relative to its share price, rendering it more attractive for income-focused investors. SCHD has paid a dividend for 13 consecutive years and grown dividends for 13 years in a row at a 3-year CAGR of 11.3%. VOO has paid dividends consistently for 14 years since inception, and has also increased its dividends for 4 consecutive years. VOO's dividends have grown at a 7.9% CAGR in a 3-year timeframe.
Both ETFs pay qualified dividends that are taxed at a lower rate than ordinary income, subject to compliance with holding period requirements. VOO tracks the S&P 500 index that includes REITs – typically deemed powerhouses, while SCHD tracks the Dow Jones U.S. Dividend 100 Index that excludes REITs. However, it should be noted that most REIT distributions are considered non-qualified dividends, which will be taxed at normal income tax rates vs. lower rates for qualified dividends.
Interestingly, despite VOO including REITs, it has a 97.33% Qualified Dividends Income (QDI) distribution for 2025, which means 97.33% of dividend distribution from VOO is treated as qualified dividend income for tax purposes. This is perhaps because real estate represents only about 2% of its portfolio. On the other hand, SCHD had a full 100% QDI status in 2024, so all of its dividend distributions qualified for the lower tax rate, rendering it more tax-efficient for dividend-focussed investors.
Neither ETF is recession proof, although SCHD offers better downside protection during a downturn because of its value-oriented, dividend-focused exposure. During periods of economic stress, investors often gravitate toward essential sectors, such as consumer staples and healthcare, which form a significant portion of SCHD's portfolio. VOO with its tech/growth tilt may see sharper drawdowns during a recession, but the ETF also rebounds stronger during bull markets.
Both ETFs are cost-effective. VOO is one of the lowest-cost ETFs available, as it charges just 0.03%, which means a $3 fee for every $10,000 invested. Minimized costs of owning a fund go a long way in establishing a path for higher potential returns in the longer run. SCHD is also affordable, with a slightly higher 0.06% expense ratio, but still very competitive.
A $10,000 investment in VOO in 2015 would have grown to more than $33,000 today, while the same $10,000 investment in SCHD in 2015 would be worth over $27,000 today, assuming dividends were reinvested. In terms of total returns, VOO has outperformed over the past decade, delivering a return of 236% versus SCHD's 174%. VOO's advantage comes from its exposure to growth-heavy sectors like tech, which SCHD underweights in favor of dividend stability.
Both ETFs appear fairly valued, as market prices of VOO and SCHD are closely aligned to their respective net asset value (NAV))/per share.
Bottom Line
SCHD and VOO are not mutually exclusive investment philosophies. These are complementary tools that tend to intersect more often than diverge. A good portfolio can include both ETFs for income and growth. Personally, I lean towards VOO. Over the past decade, VOO has returned approximately 236% in cumulative gains, significantly outpacing SCHD's 174%. Although SCHD boasts a higher dividend yield (around 4% vs. VOO's 1.3%), VOO is steadily building income potential with a 3-year dividend growth CAGR of nearly 8% (vs. SCHD's 11%) and its $6.97 per share annual payout stacks up well against SCHD's split-adjusted $1.04. For investors who value capital appreciation and rising income, VOO checks both boxes. I view VOO as a long-term wealth-building engine because of its proven and time-tested strategy.
Does SCHD Or VOO Pay Higher Dividends?
In absolute dollar terms, VOO pays a higher annual dividend of $6.97 per share vs. SCHD's split-adjusted $1.04. However, SCHD offers a much higher TTM dividend yield of 4%, versus VOO's 1.3%. This means SCHD generates more income relative to its share price, rendering it more attractive for income-focused investors.
Can I Hold Both SCHD And VOO?
SCHD and VOO are not mutually exclusive investment philosophies. These are complementary tools that tend to intersect more often than diverge. A good portfolio could include both ETFs for income and growth.
Are SCHD And VOO Recession-proof?
Neither ETF is truly recession-proof, but SCHD tends to offer better downside protection during market downturns, because of its value/income orientation. VOO with its tech/growth tilt may see sharper drawdowns during a recession, but the ETF also rebounds stronger during bull markets.
How Do SCHD And VOO Differ From Individual Stocks?
Both ETFs offer diversified exposure to a basket of stocks, which helps reduce volatility and the risk tied to investing in individual stocks.