SCHD Vs. COWZ: One Is A superior Investment Choice

Introduction

Investors have many options when it comes to equity exposure, especially in the field of value-oriented, dividend-equity funds. In this column, I present the two best choices for investors in this sector, the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD), and the Pacer US Cash Cows 100 ETF (BATS:COWZ). Both funds aim to accomplish similar objectives but use different methodologies and strategies in their portfolios.

Both of these funds hold a similarly sized portfolio of about 100 stocks, focus on the quality and value factors in their portfolios; and offer investors exposure to an index unique to the respective ETFs. Neither SCHD nor COWZ have any direct competition for their index.

In this column, I am going to directly compare these funds to determine which is more suitable for investors to hold as an equity component in their portfolio.

Note: To disclose my biases, I do not personally hold positions in either of these funds. I have in the past advised clients to invest in both SCHD and COWZ and may continue to do so moving forward, regardless of the conclusions presented in this article. My column is written for general audiences and does account not for any individual circumstance, the details of which may impact my recommendation.

The Schwab U.S. Dividend Equity ETF

There are few ETFs (especially ones not connected to a popular index like SPX or NDX) with the same staying power in retail trading circles as the Schwab U.S. Dividend Equity ETF. The fund aims to deliver a portfolio of equities focused on the “quality and sustainability of dividends.”

In its lifespan, it’s performed rather admirably, and this has attracted a lot of investor interest.

SCHD is known for its portfolio having the following characteristics:

• Holds 100 US stocks (underlying index is the Dow Jones Dividend 100)
• It is the only US-listed ETF that follows this specific index, making it unique among dividend equity funds (peers being VIG, DGRO, and others)
• Focuses on consistent dividend-paying companies
• Screens stocks for “relative strength” in fundamental analysis using financial ratios; more on that later in the Methodology section
• The fund is seen as less risky than the broad market since it is weighted toward older, dividend-paying companies that are more established, and are less heavy on tech; more on that later in the Holdings section

The Pacer US Cash Cows 100 ETF

As a relative newcomer to the scene, launching six years after SCHD, the Pacer US Cash Cows 100 ETF has become one of many in the Pacer family of funds focusing on free cash flow yield.

Since its inception, it’s performed well and has attracted a fair bit of its own following.

Note: For comparison purposes, it is important to note that SCHD’s chart begins in 2011 and COWZ’s begins in 2017.

COWZ is known for having the following portfolio attributes:

• Holds 100 US stocks (underlying index is the Pacer 100 US Cash Cows Index)
• Its index is unique and was built bespoke for the ETF, being designed and implemented all in-house at Pacer
• Screens stocks for free cash flow yield, ranked by momentum; more on that later in the Methodology section
• The fund is seen as holding only quality companies, while still boasting a balance between growth and income; more on that later in the Holdings section

Overview

Let’s take a look at the two funds’ basics side by side before we get into the weeds.

Click to enlarge

*Standard deviation, measured with a 5yr backtest that assumes all distributions taken by investors at the time of distribution.

Here are the side-by-side returns since COWZ’s inception.

Notable differences in the table above include the massive difference in AUM, with COWZ trailing far behind SCHD. COWZ still presents a fair amount of liquidity, but not nearly as much as SCHD with its nearly 3x larger AUM.

The expense ratios are also far off, with COWZ having an ER along the more “standard” for unique ETFs, at 0.49%. SCHD, on the other hand, boasts an extremely low 0.06%, in line with some of the lowest fees in the ETF industry.

That being said, I do not personally place much stock in expense ratios. My philosophy is that I’m happy to pay large expense ratios if I find them valuable. In the case of COWZ, I find a lot of value in the unique index and screening process. That will be up to individuals, and so I felt the need to highlight the difference. 43bp is considered nothing to scoff at for some.

The last point of comparison in this section is the yield. SCHD takes the crown handily, as it is heavier on “deep value” companies that pay very hefty dividends.

Dividend growth is also a contending factor for many investors, who may accept a lower current yield if the fund shows a higher or more consistent dividend growth rate moving forward.

At a glance, SCHD takes the first point of this contest as it has handily undercuts COWZ’s ER, pays a higher and more consistent yield, and has a longer and far more successful history of dividend growth.

Factor Exposure

My primary thesis behind these two funds being comparable and competing for the same place in a portfolio of stocks comes from how similar their investment philosophies are. Both funds prioritize the “value” and “quality” factors but arrive at those conclusions through their own screeners.

These “factors” are statistical anomalies identified by academic research that explain the returns of various assets. These are broken down into many labels that investors are likely already familiar with such as value and growth, small cap and large cap, profitability (also “quality”), and investment.

I won’t get too much into the nitty gritty math, but it is important to know that the five-factor model tries to explain asset pricing using these various attributes. We can calculate them, as shown in the figure below.

Notable differences between the two include:

• COWZ has significant small-cap effect exposure (“SMB”), with SCHD having close to none.
• Both have significant exposure to the value effect (“HML”), with COWZ’s coefficient being almost 50% higher than SCHD’s.
• SCHD carried a somewhat significant exposure to profitability/quality (“RMW”), while Pacer’s exposure is on par with the broader market. They are both fairly even in this regard.
• Both funds have significant exposure to the investment factor (“CMA”) with COWZ’s coefficient standing again a good 50% above SCHD’s
• This regression has an R^2 of about 92% for both, meaning that we can be fairly certain that this data is accurate, but still leaves room for surprises and the potential for these to change over time.

The conclusion to this quick discussion on factors is that COWZ has more exposure to the Fama-French factors than SCHD on the whole (and so should be more appealing to value investors), but the factors that COWZ’s portfolio is exposed to the most is one that has struggled to keep up with driving returns since 2004.

HML, or the value factor, has seen its fall from grace since peaking in 2007. CMA peaked in 2024.

Conversely, the only factor that SCHD is overweight on compared to COWZ is the single best historically returning factor: RMW or profitability/quality.

COWZ takes the point for factor exposure category since it offers deeper and more varied factor exposure, but SCHD certainly does not earn any demerits here.

Methodology

The Schwab Dividend Equity ETF

According to Dow Jones, the publisher of SCHD’s underlying index, the Dow Jones US Dividend 100 Index starts off with the broad US stock market, excluding REITs and stocks with market caps below $500M, and then screens out all stocks that do not have ten years of consecutive dividend payments.

From there, stocks are weighted by their annualized 30-day yield (“IAD Yield”) and 100 stocks are selected based on their “relative strength” ranking.

Relative strength is defined by the following characteristics, by which constituent holdings are weighted:

• Free cash flow to total debt. Companies with zero total debt are ranked first.
• Return on equity
• IAD yield
• Five-year dividend growth rate

Those four metrics are equally weighted to give each security a composite score, which determines its allocation in the index. No single stock allocation is allowed to exceed 4% of the index (excess above this will be sold during quarterly rebalancing events) and no sector can exceed 25%.

Notably, if a stock reaches 4.8% of assets at the end of any trading day, SCHD will trigger an early rebalance to lower exposure to the offending stock.

The Pacer US Cash Cows ETF

According to Pacer, the creator of COWZ’s index as well as COWZ itself, the Pacer US Cash Cows 100 Index starts off with the Russell 1000 and excludes the financial sector, excluding REITs.

The index is screened for forward-year earnings estimates. Stocks with negative values are excluded.

Stocks are then ranked by their free cash flow yield. This is defined as “trailing twelve-month (TTM) free cash flow/enterprise value.”

No stock may be weighted in the index at more than 2% but may exceed that between quarterly rebalancing.

Comparison

SCHD holds no REITs at all but has exposure to the financial sector, and COWZ has no exposure to the financial sector but holds REITs. This contrast is important to note as many investors may want more or less exposure to real estate. That will depend on the make-up of the rest of their portfolio.

I am partial to SCHD’s methodology here as it is more rigorous in the screening process. SCHD weighs several factors, which may help screen out “value traps” that may not be taken out of COWZ. For this reason, SCHD takes the point for the methodology category.

Holdings

The Schwab Dividend Equity ETF

SCHD holds 104 stocks, with an average PE Ratio (TTM) of 14.61x, less than the S&P 500’s 26.55x. It has a 5yr beta of 0.79, indicating that it is less volatile than the overall market.

Its positions are spread across sectors, with the largest allocation to a single sector being industrials at 16.73% of assets. The smallest allocation is to utilities at a paltry 0.39% allocation.

The Pacer US Cash Cows ETF

COWZ holds 103 stocks, with its PE Ratio (TTM) significantly lower than SCHD’s at 8.30x. It carries a 5yr beta of 0.91 and has volatility between the broad market and SCHD.

While COWZ has more concentration in its sector allocations than SCHD does, with its largest position being in energy at 27.50% of assets. However, its individual holdings are less concentrated, with its top ten holdings all having lower allocations than SCHD’s tenth-largest holding. Assets are spread more thinly to diversify idiosyncratic risk but at the cost of adding sector risk.

Comparison

The sector allocations are important to note as these funds have very little overlap. Between the two funds, they hold 207 positions. Of those, only 16 overlap.

For the largest overlapping holdings like AbbVie Inc. (ABBV), Cisco Systems Inc. (CSCO), and Chevron Corp. (CVX), SCHD holds almost double the exposure, but COWZ holds larger positions in the smallest overlapping holdings like Carter’s, Inc. (CRI), Leggett & Platt Inc. (LEG), and MSC Industrial Direct Co. (MSM) by double or triple, as shown in Figure 8.

This highlights the largest takeaway from the holdings section: SCHD carries more idiosyncratic stock risk (the failure of individual companies) by far.

There is absolutely a world in which I would recommend holding these funds in equal weighting as their exposures are diversified enough to be considered complimentary to each other. Here are the major stocks that do not overlap, so you can see what you’re missing out on by picking one over the other.

For investors wanting to only pick one, COWZ receives my recommendation in this instance. I prefer to have sector risk than stock risk and prefer the deeper value and quality exposures.

Quant Ratings

As we get to the last category of comparison, the funds come in 2-2. I will let the Seeking Alpha Quant issue the tiebreaker.

The Schwab Dividend Equity ETF

SCHD is currently at a buy rating with SA Quant, its highest scores in expenses, dividends, and liquidity. SCHD scores lowest on risk, at a C+.

It’s interesting to see the quant agree with me on several points here, like how the stock concentration is a risk to the portfolio.

The greatest grade SA Quant gives SCHD also sides with me, noting the incredible dividend growth streak.

The Pacer US Cash Cows ETF

COWZ also scores a buy, with a quant score just 0.01 below SCHD’s. Its highest score is in liquidity and its lowest is in expenses.

Right off the bat, SA Quant agrees with the earliest complaint we could make about COWZ in this article: it is expensive compared to SCHD (though it is considered average among ETFs more broadly).

Based on the previous scores SA Quant has given COWZ, we can see that its momentum has begun to trend down, with its 1mo price return being negative.

As discussed about 2,000 words ago at the beginning of this article, a fund has to have stellar outperformance to justify a higher ER. In this case, SA Quant has identified SCHD’s lower expenses and greater dividend metrics as giving it an edge over COWZ.

The SA Quant breaks this tie with SCHD coming out on top by 0.01 score.

Conclusion

The Schwab U.S. Dividend Equity ETF and the Pacer US Cash Cows 100 ETF both show potential for investors, but based on a variety of factors discussed in this article, we can come to the following conclusions:

• SCHD won overall as a superior investment choice but remains in tight competition with COWZ
• Investors who value price and dividend stability will value SCHD over COWZ
• Investors who want to be more aggressive in their factor tilt or sector weightings may value COWZ over SCHD

Both funds have proven their chops and there is a case to be made that investors choosing between these funds may reduce their concentration risk (the largest factor going against SCHD) by holding both funds at equal weight.

Thanks for reading.