Why Schwab US Dividend Equity ETF Could Lead the Rotation

A market rotation is about to begin, and most investors would regret not knowing where capital is likely to shift over the coming months and quarters. As is typical in the financial world, everything has to be tied to a benchmark to judge whether an asset class or specific name is overvalued or undervalued, and that is exactly where investors can begin today.

When it comes to dividend stocks, yield is the king of this sort of analysis, but the question remains where that benchmark is set. Dividend yields can (and should) be tied to the leader in the yield space, which is the U.S. ten-year Treasury bond yield, currently hovering between 4.4% and 4.5%.

Anything above the ten-year might be considered cheap or attractive in terms of price and yield, and the opposite if it falls below the bond yield.

Moreover, investors must also consider the future direction of the bond market in the coming months, which is closely tied to the broader economic landscape. Bond yields could be lower in the future as part of the current business cycle, making dividend stocks (with attractive yields) the preferred place for capital to rotate into.

This is exactly where the Schwab US Dividend Equity ETF (NYSEARCA: SCHD) comes into play.

Schwab Dividend ETF Investors Can Be Early

This exchange-traded fund (ETF) has a dividend yield of roughly 4% today. While it is below the benchmarked ten-year yield, the future matters more in today’s setup, considering that the ten-year has been flattish and trending for the past six months.

There were no breakouts despite inflation fears and trade tariff volatility, which is good news for those looking to get into dividend stocks. This means that the upside in bond yields is capped at this point, and the next leg could be lower depending on the Federal Reserve's (Fed) reaction to possibly cutting interest rates.

That being said, entering this dividend ETF today might be too early, but at least investors can lock in today’s price and yield before bonds move. At this point, it might already be too late to consider entering dividend stocks.

Some Moves Are Happening Now

Recently, the broader market trend seems to favor stocks in the consumer staples sector, indicating a preference for safety due to current market volatility. This trend is mirrored in recent institutional purchasing of this dividend ETF.

As of the most recent quarter, up to $1.4 billion worth of institutional buying occurred in this ETF, demonstrating support for the underlying thesis. Remembering that today’s yield in the ETF compared to the ten-year is not a call for an obvious buy, investors can somewhat assume that the so-called “smart money” is willing to be early on this call.

Besides this recent buying, investors can add the $14 billion also bought in this ETF over the past quarter, creating a broader trend in the rotation headed into safety and dividend income connected to the overall uncertainty currently present in the S&P 500 index.

Price Action Leaves Valuable Clues

Another way to examine this potential rotation is by analyzing the price action between this ETF and the S&P 500 index, particularly over the past quarter. The two names had been closely matched during the first quarter of 2025. However, this dynamic changed significantly after the Liberation Day of April 2025.

When the new tariffs were announced, the S&P 500 and the Schwab Dividend ETF fell sharply. However, what happened afterward tells investors all they need to know.

The S&P 500 recovered all of Liberation Day’s losses in record time, while the dividend ETF remains within the pullback levels.

This lackluster performance and failure to catch up can be attributed to the markets shifting their focus to growth stocks in the technology sector rather than seeking safety, a reaction that is to be expected when the broader market is on such an aggressive run higher.

However, this gap will eventually need to be filled, and that is where the rotation into safety or high-yield stocks will come in handy. As the stock market approaches potential resistance at its previous all-time highs, uncertainty is likely to prompt investors to seek safe havens, such as bonds and dividend stocks.

In this manner, a rotation into bonds will lower their yields, making the yields and upside in the Schwab Dividend ETF seem more attractive than they do today. This way, investors can get the best of both worlds: the income from dividends, as well as the upside inherent in equity investing.

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