By Ian Salisbury

One of the market's biggest dividend ETFs just dramatically increased its bet on energy stocks. For investors looking to play defense amid a rocky stock market, that could be a danger sign.

The index fund Schwab US Dividend Equity ETF is a hit with investors. With nearly $70 billion in assets, it is the second-largest fund of its type. In the past few weeks, investors have funneled more than a net $2 billion into the fund, according to FactSet. That probably represents a search for havens as uncertainty rocks the stock market.

But last week, the fund made a big move that should give some of these investors pause. It nearly doubled its exposure to volatile and economically cyclical energy stocks to 21% from 12%, adding names like Halliburton, Ovintiv, and ConocoPhillips, now the largest holding at 4.7% of the fund. To put that in context, the entire energy sector makes up less than 4% of the S&P 500.

The move, highlighted in a recent report by the research firm CFRA, was part of a regularly scheduled annual "re-constitution." Like most index funds, the Schwab U.S. Dividend Equity ETF periodically overhauls its holdings to keep its portfolio on target with its investment objectives.

The ETF picks stocks based on factors like dividend yield, dividend growth rate and return on equity, a Schwab spokeswoman in an email. "SCHD has provided investors competitive total returns and a growing dividend income" since its inception in 2011, she wrote.

All the same, the changes make energy stocks the fund's single largest sector. Consumer represent 19% of the portfolio and healthcare, 15%.

Energy stocks have returned 9.7% so far this year, the best of any sector in the S&P 500, which is down about 4% overall. But with shares closely tied to commodity prices, they can also be extremely sensitive to economic trends. One recent study from State Street Global Advisors found energy to have the highest five-year volatility of any corner of the stock market.

What is more, the outlook for energy stocks is iffy. Oil prices are down about 2% year to date. Those losses could accelerate if OPEC follows through on a recent plant to boost production. Steel tariffs are adding to costs for exploration and production companies.

CFRA analyst Aniket Ullal says that while there is nothing inherently wrong with the Schwab fund's approach, investors who are interested in safety might be better off in rival funds. Possibilities include the Vanguard Dividend Appreciation ETF or the iShares Core Dividend Growth ETF.

Those funds' bigger emphasis on companies that have raised dividends as opposed to those with the highest yields means energy is a much smaller share of their portfolios. It is less than 6% at both funds.

Ullal said the Schwab fund does have one key advantage against those rivals: Its yield is 3.8%, compared with 1.8% for Vanguard Dividend Appreciation and 2.3% for iShares Core Dividend Growth.

But for safety-minded investors, the risks probably aren't worth it. "Be aware of the trade off," he said. "You will get higher yields, but you are taking on more risk."

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 02, 2025 15:07 ET (19:07 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.