Schwab US Dividend Equity (SCHD): Something is about to break

The Schwab US Dividend Equity (SCHD) ETF has drifted downwards in the past few weeks, as I predicted here. The fund slipped to $68.24 on Thursday, the lowest level since June this year. It has crashed by more than 10% from the highest point this year, underperforming other popular ETFs like SPY and QQQ.

The SCHD ETF is one of the most popular funds in the financial market, especially among income-focused investors. Over the years, the 5-star rated fund has delivered both strong dividend growth and returns.

Data compiled by SeekingAlpha shows that the fund has a dividend yield of 3.82%, which is bigger than other related funds like VYM and DIVO. It has also had stronger CAGR growth than its peers over the years. Its CAGR in the past 5 years stood at 13.69%, higher than VYM’s 5.60% and DGRO’s 9.66%. 

The SCHD ETF thrived in an era of low-interest rates. Recently, however, the Federal Reserve has maintained an extremely hawkish tone as it pushed interest rates to the highest level in over two decades.

The rising interest rates have led to competition in the yield market. While the SCHD ETF is yielding 3.82%, other risk-free assets are offering much better. According to Bankrate, many certificates for deposits (CDs) have a yield of over 5.65%. Similarly, money market funds are yielding 5.33%.

Therefore, in this case, it seems like risk-free assets – read cash – are outperforming the SCHD ETF. The most recent inflation report showed that the headline CPI rose by 3.6% in September. This means that the SCHD has a negative real return while cash is doing much better.

The biggest case for investing in SCHD vs money market funds is that it has strong dividend growth. While this is true, I suspect that its dividend growth will be a bit slow because of its composition. Its biggest components are in industrials, health care, financials, and consumer staples.

As I warned a few months ago, its regional bank exposure is quite worrying. Also, the fund has not invested materially in energy, a sector that I expect to do well in this environment.

SCHD chart by TradingView

Technicals are also not supportive of the Schwab US Dividend Equity ETF. as shown above, the stock formed what looks like a double-top pattern and is now a few points above its neckline. It remains below the 50-day and 100-day moving averages, which have made a bearish crossover pattern.

Therefore, technicals suggest that the ETF will continue falling in the coming months. A break below the neckline of this double-top pattern at $68.20 will open the possibility of it falling to the next key support at $63.62, the lowest point in 2022. This price is about 7.17% below the current level.

I believe that something in the market will break soon as interest rates remains at the highest point in decades. As such, it makes sense to move into cash, through money market funds and then move back to SCHD when the Fed starts cutting rates. This will likely happen in Q1 of 2024.