Investors are betting that interest rates won’t shoot through the psychological 3% barrier. One sign? Cash pouring into this dividend-focused equity ETF.
The Schwab U.S. Dividend Equity ETF (SCHD) took in more than $2.3 billion last week, the most on record. That’s nearly 100 times the average weekly amount since the $7.3 billion fund was launched in 2011. The move came after jobs and wage data showed tepid inflation growth, which helped yields on 10-year Treasurys retreat from last month’s highs — a boon for high yielding dividend stocks.
“The whole ‘rate scare’ thing seems to be really fading, not that rates are going to be at 2% anytime soon, but the concept of them blowing through 3%,” said Michael Purves, Weeden’s chief global strategist. “The Treasury market is getting some support, and so that will also help underscore dividend equities as well.”
The yield on 10-year Treasurys was 2.88% Tuesday morning. The Federal Reserve is almost certain to increase interest rates at its meeting tomorrow, the first under Federal Reserve Chairman Jerome Powell. Some investors have expressed worry that the Fed could quicken its path, guiding rates on shorter-dated bonds higher. But those piling into Schwab’s dividend ETF may not be expecting the surge anytime soon.
“If you think interest rates are going to 3.5%, and you’re looking at a high dividend sector like utilities, those things are going to sell off because you’re going to get a much safer yield, a much more attractive yield,” Purves said.
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The ETF tracks the Dow Jones Dividend 100 Index to capture the “performance of high dividend yielding stocks issued by U.S. companies that have a record of consistently paying dividends,” according to the fund’s prospectus. The gauge is down 2.7% this year, compared with a 1.5% increase in the S&P 500.
Still, despite the recent enthusiasm for dividends, investors need to listen to what the Fed has to say. Everything could change if the central bank signals that faster rate hikes are coming.
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“Based upon Powell’s testimony on Capitol Hill, he could support a more aggressive increase in rates both this year and next,” Paul Nolte, a portfolio manager at Kingsview Asset Management in Chicago, wrote in a note to clients Monday. “The coming weeks could mark turning points in both the stock and bond markets as the rally broadens out or flames out.”
