The Schwab US Dividend Equity ETF (SCHD) has done well this year and is hovering near its all-time high of $29.33. It has risen by 16.2% in 2024, underperforming the S&P 500 index, which has risen by over 25% this year.
SCHD ETF has formed a risky pattern
In addition to lagging the broader market, the SCHD ETF is at risk of a major reversal after forming a rising wedge pattern.
On the chart below, we have drawn a trendline that connects all higher highs since May 16 of this year. We also connected all the higher lows since that period.
A closer look shows that the fund has remained inside that ascending channel, which is commonly known as a rising wedge pattern. In most periods, this is one of the most bearish patterns in the market.
The bearish view is usually confirmed when the two lines are approaching their convergence, which is about to happen.
Further worryingly is the fact that the SCHD ETF has formed a bearish divergence pattern. The chart shows that the two lines of the MACD indicator have continued to form a series of lower lows and lower highs. Two bars have even moved to the red area.
The Relative Strength Index (RSI) index has also continued to form a bearish divergence pattern.
Therefore, there is a risk that the Schwab US Dividend Equity ETF will drop sharply in the coming months or weeks. This decline will be part of mean reversion since the fund remains about 8% above the 200-day moving average at $26.70.
The bearish view will be invalidated if the SCHD fund rises above the psychological level of $30, which is at the upper side of the wedge pattern. If this happens, it will rise to the key resistance level at $35.
Read more: SCHD and VYM ETFs forecast for November 2024
Is the Schwab US Dividend Equity ETF really a dividend fund?
At the same time, there are questions about whether the SCHD ETF is a good dividend or income fund in the first place.
In most cases, investors buy the fund because of its long track record of paying and growing its payouts to investors.
SCHD has achieved the latter because it has grown dividends for 12 consecutive years. Its ten-year CAGR rate was 11.1%, much higher than the median of all ETFs at 6.30%. Also, its dividend growth rate has been better than other comparable funds.
The challenge, however, is that the SCHD has a dividend yield of just 3.4%, which is higher than the S&P 500 index, which has 1.25%.
However, for dividend-focused investors, there are other simpler ways of generating dividends over time. A good example of this is the VanEck High Yield Muni ETF (HYD), which has a dividend yield of 4.23%.
The Columbia Multi-Sector Municipal Income ETF (MUST) yields 3.50%, while the Vanguard Tax-Exempt Bond Index Fund (VTEB) yields 3.10%. The benefit of these funds compared to the SCHD ETF is that they invest in tax-exempt municipal bonds.
The other high-yielding alternative for SCHD is US government bonds, with the 10-year yielding 4.40% and the 30-year yielding 4.60%.
Read more: Love the SCHD ETF? CLM and CRF are better yielding alternatives
To be sure, investing in government bonds has its limitations, especially now that the Federal Reserve has started to cut interest rates. Also, bonds lack the appreciation that a fund like SCHD has over time.
Indeed, the SCHD ETF’s total return has been strong over the years. It has jumped by 81% in the past five years, making it a better performer than municipal bonds and US government bonds. However, its total return has constantly underperformed the S&P 500 index, making the latter the better ETF to buy.
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