The Schwab US Dividend Equity ETF (SCHD) has pulled back sharply in the past few weeks, moving from a high of $35 in August to the current $32.5. This article highlights some of the top reasons why it is falling and what to expect in October.
SCHD ETF is falling as government bond yields jump
The Schwab US Dividend Equity ETF is popular among investors who are seeking for dividends. Over the years, it has demonstrated strong dividend growth, even as its yield has remained relatively low.
Now, however, the fund is falling because of the competition from Treasuries. Data shows that the fund has a dividend yield of about 3.2%. In contrast, the ten-year yield has jumped to 5.2%, while the 3-month bill is yielding over 4%.
These numbers mean that many income investors are moving to short-term bonds to capture the yield, which is expected to keep rising in the foreseeable future.
However, SCHD still has more benefits when compared to bonds. In addition to its dividend yield, the fund also has growth. In October, this growth will depend on the upcoming earnings season, where analysts expect top companies to publish strong results.
The average estimate is that the S&P 500 Index will have earnings growth of over 25% in the second quarter. In reality, the real figure will be much higher than that.
SCHD is relatively overvalued
The other reason behind the ongoing SCHD ETF retreat is the fact that it is a bit overvalued following its surge that has seen it outperform the benchmark S&P 500 and Nasdaq 100 indices this year.
Data on its website shows that it trades at a trailing twelve month (TTM) PE ratio of 19.8. In contrast, the S&P 500 Index has a forward multiple of 19.1. As such, there are signs that investors are starting to book profits after the surge.
Rotation back to AI stocks
There is also a sign that investors are starting to rotate back to companies in the artificial intelligence industry. Nvidia stock has jumped and is nearing the all-time high, while other top names like Microsoft, Meta Platforms, and Apple are in an uptrend.
SCHD is often seen as an anti-AI ETF because of its limited exposure to the industry. Some of the biggest AI names in the fund are the likes of Qualcomm and Texas Instrument, which share in the sector has narrowed.
What next for SCHD ETF in October?
SCHD ETF chart | Source: TradingView
The daily chart shows that the fund is moving from bad to worse. It has slipped from a high of $35 in August to the current $32.53. During this retreat, the fund has slumped below the 50-day Exponential Moving Average (EMA), confirming the bearish outlook.
At the same time, the Relative Strength Index (RSI) has continued falling and has reached the oversold level. Also, it has slumped below the Major S/R pivot point of the Murrey Math Lines tool.
Therefore, the path of the least resistance for the ETF is lower, with the immediate target being the oversold level of $30.8. It will then bounce back as investors buy the dip.
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