When we look at the performance of exchange-traded funds like SCHD and SCHG, it’s hard to ignore the outsized influence of the so-called Magnificent Seven — the top tech and growth stocks driving the market.
Companies like Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA) have dominated headlines and portfolios alike, making up a significant portion of many ETFs. But what does this concentration mean for ETF investors?
Let’s start with SCHG, Schwab’s U.S. Large-Cap Growth ETF.
This fund, which has returned a staggering 145% over the past five years, owes much of its performance to its top holdings. Around 56% of SCHG’s assets are tied up in just its top 10 stocks, including heavyweights like Amazon (AMZN), Tesla (TSLA) and Meta Platforms (META).
For context, over 11% is in Apple alone, with another 9.47% in Microsoft and nearly 9% in Nvidia. The bulk of this ETF is riding on the success — or failure — of these tech giants.
On the flip side, we have SCHD, Schwab’s U.S. Dividend Equity ETF.
While it’s designed to be less volatile and focused on steady income, SCHD has still posted solid returns. Its dividend yield of 3.67% makes it a favorite among income-seeking investors, but even SCHD hasn’t been immune to the pullback in broader markets. After a 33% gain from its 2023 lows, it’s now sitting closer to a 22% net gain.
This level of concentration — particularly in SCHG — presents both opportunities and risks.
On one hand, these top names are the backbone of the Technology sector (XLK) and have powered much of the market’s growth in recent years. On the other, such heavy weighting means that if even one of these giants stumbles, it could ripple through the entire ETF.
Nvidia, for example, has already seen its stock questioned due to concerns about semiconductor demand and capital expenditures. Tesla’s recent volatility is another example of how quickly sentiment can shift.
For investors, the key is understanding what you’re buying. SCHG may look diversified with over 200 holdings, but when 56% of its assets are in the top 10 stocks — mostly from the Technology sector — diversification quickly fades.
If the Magnificent Seven shows any cracks, the broader market could take a hit, and ETFs like SCHG would feel it more acutely than something like SCHD.
That’s not to say these funds aren’t worthwhile.
SCHG’s growth has been spectacular, and SCHD offers a reliable income stream with less volatility. The important thing is balancing your exposure. If you’re concerned about concentration risk, consider pairing SCHG with a more evenly distributed ETF or increasing positions in sectors less dependent on mega-cap tech.
In a market where the Magnificent Seven hold such significant sway, keeping a close eye on their performance isn’t just smart — it’s essential. Diversify, manage risk, and as always, be prepared to adjust when the market calls for it.
I’ll see you in the markets.
Chris Pulver
Chris Pulver Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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The profits and performance shown are not typical. We make no future earnings claims, and you may lose money. The trades expressed are from historical back-tested data from June 2022 through April 2024 combined with Chris’s live money trading from June 2024 through December 15, 2024 to demonstrate the potential of the system. The average winning trade during the backtested data was 14.3% while the average losing position was 65.3% per trade and a 89.8% win rate.
