Although stocks have handily outperformed all other asset classes (bonds, commodities, and real estate) over the last century, this doesn't mean equities advance in a straight line. Pullbacks and stock market corrections are the price of admission to Wall Street's long-term wealth creation machine.
As of the closing bell on March 27, the ageless Dow Jones Industrial Average (^DJI 0.12%) and technology-driven Nasdaq Composite (^IXIC 1.83%) were officially in correction territory, with respective declines of 10.01% and 12.56% from their all-time highs. The benchmark S&P 500 (^GSPC 0.84%) is also within striking distance of entering correction territory (down 8.74%).
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ETFs can be a smart choice as stock market volatility picks up
When volatility picks up on Wall Street, it's not uncommon for investors to seek out safe-haven investments. This is where exchange-traded funds (ETFs) can be helpful.
An ETF is effectively a basket of securities under one umbrella that trades like a stock on an exchange. For example, if you wanted to invest in growth stocks, biotech stocks, or China stocks, there are ETFs that allow you to do so. With the click of a button, you can achieve instant diversification or concentration at a relatively low fee (known as the net expense ratio).
While there are plenty of individual stocks that have become attractive as the Dow and Nasdaq Composite have entered correction territory, not every investor has the time to research individual companies. That's where the Schwab U.S. Dividend Equity ETF (SCHD +1.07%) stands out as an exceptionally smart buy.
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Four reasons the Schwab U.S. Dividend Equity ETF is a genius buy as the stock market tumbles
Although the Schwab U.S. Dividend Equity ETF isn't immune to stock market corrections, bear markets, and crashes, it does have four well-defined advantages.
Firstly, dividend stocks have historically outperformed non-payers over long periods. In "The Power of Dividends: Past, Present, and Future," analysts at Hartford Funds, in collaboration with Ned Davis Research, found that dividend stocks more than doubled the annualized return of non-payers over 51 years (1973-2024): 9.2% for dividend stocks vs. 4.31% for non-payers.
Secondly, this same analysis also uncovered that dividend stocks are notably less volatile than non-payers. Between 1973 and 2024, dividend payers were 6% less volatile than the benchmark S&P 500, while the non-payers were 17% more volatile. Given that abrupt stock market corrections are known to tug at investors' heartstrings, the Schwab U.S. Dividend Equity ETF is designed to minimize these ebbs and flows.
NYSEMKT: SCHD
Key Data Points
Thirdly, this ETF is packed with 104 holdings, of which 102 are time-tested companies (the other two are futures contracts). With over 100 positions, no single investment is imperative to the fund's success or capable of sinking the proverbial ship.
Fourth, and perhaps most importantly, the Schwab U.S. Dividend Equity ETF is attractively priced amid a historically pricey stock market. As of Feb. 28, the average price-to-earnings (P/E) ratio of the 102 stocks that comprise the fund was approximately 20. As of March 27, the trailing 12-month P/E ratio of the S&P 500 was nearly 24.
The icing on the cake is that investors will also enjoy a 3.4% dividend yield atop these clear advantages.
