As Fed Rate Fears Ebb, Dividend ETF Sees 27th Week of Inflows

(Bloomberg) -- Investors continue to bet that interest rates won’t shoot through the psychological three percent barrier. One sign: the long-running love affair with a dividend-focused equity exchange-traded fund.

The Schwab U.S. Dividend Equity ETF, ticker SCHD, took in $1.4 million last week for its 27th straight week of inflows even as the Federal Reserve looks certain to raise rates when its two-day policy meeting concludes Wednesday. It’s the fund’s fourth longest streak since its inception in 2011 and the longest since September 2016.

The flows, though less than in prior weeks, came after jobs and wage data showed tepid inflation growth, which helped yields on 10-year Treasuries retreat back toward 2.8 percent after rising above 2.95 percent last month, the first time they’ve done that in four years. High-yielding dividend stocks lose their appeal when bonds throw off cash at similar levels to stocks.

“The whole ‘rate scare’ thing seems to be really fading, not that rates are going to be at 2 percent anytime soon, but the concept of them blowing through 3 percent,” said Michael Purves, Weeden & Co.’s chief global strategist. “The Treasury market is getting some support, and so that will also help underscore dividend equities as well.”

The yield on 10-year Treasuries was 2.88 percent Tuesday morning. Traders assign a 100 percent probability that the Fed will increase rates after its first meeting under Chairman Jerome Powell. Some investors have expressed worry the central bank could quicken its path, guiding rates on shorter-dated bonds higher. But those piling into Schwab’s dividend ETF may not be expecting the surge anytime soon.

“If you think interest rates are going to 3.5 percent, and you’re looking at a high dividend sector like utilities, those things are going to sell off because you’re going to get a much safer yield, a much more attractive yield,” Purves said.

The ETF tracks the Dow Jones Dividend 100 Index to capture the “performance of high dividend yielding stocks issued by U.S. companies that have a record of consistently paying dividends,” according to the fund’s prospectus. The gauge is down 2.7 percent this year, compared with a 1.7 percent increase in the S&P 500 Index.

Still, despite the recent enthusiasm for dividends, the Fed’s commentary around its decision will be critical, particularly if the central bank signals that faster hikes are coming.

“Based upon Powell’s testimony on Capitol Hill, he could support a more aggressive increase in rates both this year and next,” Paul Nolte, a portfolio manager at Kingsview Asset Management in Chicago, wrote in a note to clients Monday. “The coming weeks could mark turning points in both the stock and bond markets as the rally broadens out or flames out.”

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