SCHD ETF rally has stalled as a major risk emerges despite soaring inflows

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The Schwab US Dividend Equity ETF (SCHD) has moved sideways in the past few weeks as the recent rally has stalled. After peaking at $35, and becoming the biggest dividend ETF, it has retreated to $34.55, and formed several bearish patterns that may lead to a brief pullback in the near term. 

SCHD ETF technicals point to a brief retreat

The daily chart shows that the SCHD ETF peaked at $35.33 in August as its strong rally gained momentum. It has moved sideways since then, while remaining above the 50-day and 100-day Exponential Moving Averages (EMA). Remaining above these averages suggests that bulls remain in control for now.

The risk, however, is that technicals are sending some warning. For example, the Relative Strength Index (RSI) has dropped from the overbought level of 74 to the current 57, and is still pointing downwards. 

The two lines of the Percentage Price Oscillator (PPO) have formed a bearish crossover and are also pointing downwards. The histogram of this indicator has remained below the zero line since August 27. 

These oscillators suggest that the ETF has formed a bearish divergence pattern, which is a common bearish reversal sign in technical analysis. 

At the same time, the fund formed an island reversal pattern. This is a common reversal pattern that forms after an asset forms a gap and then consolidates. In this case, it formed a small gap on August 19 and then continued to consolidate since then.

Therefore, the ETF will likely have a bearish breakout in the coming days. If this happens, the next key level to watch will be at $33. A move above the resistance level of $35.33 will confirm the bullish breakout, potentially to $40.

SCHD ETF chart | Source: TradingView

Schwab US Dividend Equity ETF is Firing on All Cylinders

Despite the weak technicals, there are signs that the Schwab US Dividend Equity ETF is firing on all cylinders this year as investors embraced its role as a hedge against artificial intelligence (AI) risks. That’s because, unlike other mainstream ETFs like those tracking the S&P 500 and Nasdaq 100, SCHD has no stakes in mainstream AI companies like Micron and SanDisk.

Instead, its biggest constituents are companies like Merck & Co, Amgen, and Abbott Labs. Merck makes drugs and vaccines, including Keytruda and Gardasil. It also focuses on infectious diseases and animal health. 

Amgen is focused on biotechnology and biologic medicines in general medicine, rare diseases, inflammation, and oncology. Abbot Laboratories offers medical devices, diagnostics, and nutrition. 

The fund also has a large stake in companies like Coca-Cola, Chevron, ConocoPhillips, Verizon Communications, and UnitedHealth Group. Most of these companies have done well this year, helped by their market share and demand.

According to its website, information technology accounts for a small part of the portfolio. Its top tech names are firms like Texas Instruments, ADP, Qualcomm, IBM, Cisco, Microchip, Paychex, and HP. Good names, but not the ones making headlines this year. 

Investors have poured their cash into the SCHD ETF this year, with its inflows rising to over $20 billion. This growth has made it the biggest dividend fund in the world, overtaking the Vanguard Dividend Appreciation (VIG) fund.

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