The Schwab US Dividend Equity (SCHD) ETF remained in a tight range this week as it continued to underperform other tech-heavy indices like the S&P 500 and Nasdaq 100. This article highlights whether the SCHD ETF is a good fund to buy.
Why the SCHD ETF is underperforming the stock market
The SCHD ETF has underperformed the broader stock market in the past few months. Its total return in the last twelve months was minus 1.01%. In contrast, the S&P 500 and Nasdaq 100 indices have jumped by 19% and 28% in the same period.
The same has happened this year as its total return rose by 1.67%, while the other two have jumped by 18% and 24%, respectively.
This divergence is primarily because the SCHD ETF is a value-focused fund. It is made up of traditional companies that have a long track record of paying dividends.
Most companies in the fund are in the energy sector that has struggled this year with low crude oil prices. Energy companies have a market share of about 20% in the fund. It is followed by companies in the consumer staples, which account for about 18.4%.
The other companies in the fund are health care, industrials, financials, and consumer discretionary. Some of the biggest companies in the fund are Abbvie, Cisco, Merck, PepsiCo, Amgen, Coca-Cola, Lockheed Martin, and Chevron.
These are all good companies that dominate in their industries. For example, Cisco is the biggest player in the networking industry, while PepsiCo and Coca-Cola are the top players in the beverage and snack industries.
Therefore, the fund has underperformed because it has limited access in the technology industry. In contrast, mainstream indices like Nasdaq 100 and Nasdaq 100 are mainly dominated by technology giants like Nvidia, Microsoft, and Meta Platforms.
Therefore, the most likely scenario is where it continues to underperform the mainstream indices as investors are mostly focused on fast-growing technology companies with an exposure to the AI sector.
Still, there is a likelihood that there will be a rotation from growth to value, especially now that there are concerns that the AI bubble will burst once the spending slows down. Remember, 50% of Nvidia’s sales are from a few companies like Microsoft and Meta Platforms.
Schwab US Dividend Equity ETF technical analysis
The daily timeframe chart shows that the SCHD ETF stock has formed a highly bullish chart pattern known as an inverse head-and-shoulders pattern.
This pattern is made up of three key parts, including a head, shoulders, and a neckline. The head is at $23.40, while the right and left shoulders are at around $26 and the neckline is at $27.
Therefore, the most likely scenario is where the stock makes a strong bullish breakout in the coming weeks. If this happens, the next key target to watch will be at $27.75. A move above the neckline will point to more gains, potentially to the key target level at $28.6, the highest point in 2024.
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