SCHD Is Crushing the Vanguard High Dividend Yield ETF (VYM) This Year. I Predict That Advantage Is About to Fade.

Investing in high-yield dividend stocks offers a one-two punch of market participation and passive income. But if a company cuts its payout, then the passive income stream can decrease.

Exchange-traded funds (ETFs) with high-yield dividend stocks can be an effective way to collect passive income across a basket of stocks, thereby reducing the risk of a single company or a few companies slashing their payouts.

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is up 21.7% year-to-date (YTD) at the time of this writing, crushing the 10.9% gain in the Vanguard High Dividend Yield ETF (NYSEMKT: VYM). That's a big difference for two ETFs that sound similar on paper. What's more, the Schwab ETF yields 3.2% compared to 2.4% for the Vanguard ETF.

Here's why the Schwab U.S. Dividend Equity ETF is doing so much better than the Vanguard High Dividend Yield ETF this year, and why the Vanguard ETF is the better long-term buy now.

The energy sector's 50.2% gain is driving SCHD

A major reason for the Schwab U.S. Dividend Equity ETF's strong YTD performance is its heavy concentration in energy stocks. The energy sector just hit an all-time high and is up 50.2% YTD at the time of this writing -- making it by far the best performing sector this year.

The Schwab ETF has a 14.1% weighing in the energy sector -- which is far higher than the S&P 500's (SNPINDEX: ^GSPC) 3.4% weighting. However, the Schwab ETF has drastically reduced its energy sector exposure. In late March, 23.9% of the Schwab ETF was invested in energy stocks.

The Schwab ETF is benchmarked to the Dow Jones U.S. Dividend 100 Index, which reflects the performance of high-yield dividend stocks. The index will rebalance quarterly, often cycling out of red-hot stocks whose prices have outpaced dividend growth rates, thereby compressing yields, and into industry-leading companies whose yields have increased because of their underperforming stock prices. As a result, the Schwab ETF has a high portfolio turnover rate of 40.6% as of Sept. 30 compared to just 11.3% for the Vanguard ETF as of fiscal year-end Oct. 31, 2025.

The high turnover rate has caused the Schwab U.S. Dividend Equity ETF's energy sector weighting to go down in lockstep with the sector's outperformance. Now, healthcare -- another high-yielding sector -- makes up 20.7% of the ETF, and consumer staples is 20.4%. This is precisely the opposite of how the S&P 500 works. This market-cap weighted index lets its winners run, which is why the technology sector now dominates the S&P 500 with a 39.7% weighting.

Broadcom is 6.9% of the Vanguard High Dividend Yield ETF

The Vanguard High Dividend Yield ETF is less yield-focused than the Schwab U.S. Dividend Equity ETF. Its largest holding is Broadcom (NASDAQ: AVGO) with a 6.9% weighting, followed by JPMorgan Chase (NYSE: JPM) with a 3.8% weighting. Broadcom and JPMorgan Chase used to be far higher yielding, but both stocks have gone up severalfold in recent years, which has pushed Broadcom's yield to just 0.7%, and JPMorgan Chase down to 2%. So while the Schwab U.S. Dividend Equity ETF would have kicked out Broadcom once its yield dropped too far, the Vanguard High Dividend Yield ETF kept it, which paid off given Broadcom's massive gains.

The Vanguard High Dividend Yield ETF is benchmarked to the FTSE All-World High Dividend Yield Index, which uses a forecast dividend yield ranking process to screen stocks based on higher-than-average dividend yields and then weights them based on market cap. Broadcom is a bit of an anomaly. It passed these screens years ago due to its aggressive dividend increases and previously high yield. But Broadcom's market cap has gone from $234 billion at the end of 2022 to $1.66 trillion today, which is nearly double the size of JPMorgan Chase -- the world's most valuable bank. By comparison, companies aren't ranked by market cap in the Schwab U.S. Dividend Equity ETF because the Dow Jones U.S. Dividend 100 Index uses a modified market cap weighting system.

In addition to letting its winners run more than the Schwab ETF, the Vanguard High Dividend Yield ETF has notably different sector weightings. While the Schwab ETF has a combined 55% in healthcare, consumer staples, and energy stocks, the Vanguard ETF's combined weighting in those three sectors is just 31.3% -- which is still a lot higher than the S&P 500's 17.1% combined weighting but not nearly as concentrated as the Schwab ETF. The Vanguard ETF has a significant 21.1% weighting in financials, 13.7% in technology, and 13.7% in industrials. These sectors are more cyclical and lower-yielding than healthcare and consumer staples, but they also tend to grow faster over the long term.

The better high-yield ETF for long-term investors

The Vanguard High Dividend Yield ETF has more balanced sector weightings than the Schwab U.S. Dividend Equity ETF, which has helped The Vanguard High Dividend Yield ETF outperform the Schwab U.S. Dividend Equity ETF over the last three-year and five-year periods -- even when factoring in higher dividends from the Schwab ETF.

Both ETFs include many top high-yield value stocks. But the Vanguard High Dividend Yield ETF focuses less on current yield and more on quality earnings growth across all market sectors. Its lower turnover rate is better suited to let its winners run, whereas the Schwab ETF is more prone to trading in and out of stocks. For those reasons, I'd expect the Vanguard High Dividend Yield ETF to outperform the Schwab U.S. Dividend Equity ETF over the long term, making it the better buy now.

JPMorgan Chase is an advertising partner of Motley Fool Money. Charles Schwab is an advertising partner of Motley Fool Money. Daniel Foelber has positions in Broadcom and Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Broadcom, JPMorgan Chase, and Vanguard High Dividend Yield ETF. The Motley Fool recommends Charles Schwab and recommends the following options: short September 2026 $95 calls on Charles Schwab. The Motley Fool has a disclosure policy.