The Schwab U.S. Dividend Equity ETF (SCHD -0.24%) is having a tremendous year so far. Year to date, the fund is up 25%, compared to a 14% total return for the Vanguard S&P 500 ETF (VOO -0.13%).
But it's also about 4% to 5% off its high at a time when the S&P 500 (^GSPC -0.06%) is retesting new all-time highs. Does that suggest a reversal is beginning? Is it time to sell, or at least consider shifting new investments elsewhere?
I don't think so, and here's why.
Image source: The Motley Fool.
SCHD's fundamental case hasn't changed
The Schwab U.S. Dividend Equity ETF is a portfolio of roughly 100 stocks selected based on high-quality balance sheet health, a history of dividend growth, and an above-average dividend yield. It includes some of the most financially durable companies in the world, including Coca-Cola, Procter & Gamble, and Chevron.
With corporate earnings growth still looking strong, gross domestic product (GDP) rising at a reasonable rate, and the labor market demonstrating resilience, there's no reason to think that the investment case for these companies has materially changed recently.
NYSEMKT: SCHD
Key Data Points
The economy still favors SCHD
The immediate macroeconomic concerns are inflation and rising interest rates. While those factors aren't necessarily bullish to the fund's investment case, they're not necessarily as damaging as one might think.
Most of Wall Street would tie the Fed's recent rate hike to inflation. However, Fed Chairman Kevin Warsh also said that economic activity has continued to expand, consumer spending is still positive, and productivity growth is strong.
Those latter catalysts could be considered the "good" reasons to raise rates. If the Fed can hike rates, address inflation concerns, and still not risk pushing the U.S. economy toward recession, stocks can still move higher. I think that's a big reason why we've seen the Vanguard S&P 500 ETF rising post-Fed meeting.
Growth has been leading value since the meeting, but that doesn't mean the investment case for the Schwab U.S. Dividend Equity ETF is broken.
This is an opportunity, not a reason to sell
Stock market pullbacks happen all the time and are completely normal. On average, a 10% correction occurs roughly every one to two years. Since 1980, there have been only three calendar years when the S&P 500 didn't fall by 5% at least once.
A 4% decline for the Schwab U.S. Dividend ETF is a product of short-term volatility, not a change in the investment case for the fund. In fact, this could be an enticing opportunity to pick up some shares at a slight discount.
The companies in this fund are generating profits and paying dividends, and they've been growing those dividends for years. That's a combination that could be a permanent fixture in any portfolio.
