The Schwab US Dividend Equity ETF (SCHD) is having a good year, helped by the ongoing stock market rally. The highly popular dividend ETF surged to a record high of $29.37 this month, up by over 37% from its lowest level in 2023. 

This rally has mostly mirrored the performance of the broader stock market, which has seen the Dow Jones, S&P 500, and Nasdaq 100 indices surge to their all-time high. Here are the three reasons why the SCHD ETF rally will likely go on and the risks that lie ahead.

SCHD ETF is a bargain

The first reason why the SCHD fund could keep rising in the near term is that it is a big bargain compared to the broader market.

Data on its website shows that the fund has a price-to-earnings ratio of 18.42, a price-to-cash flow multiple of 10.2, and a price-to-book ratio of 3.15. 

In contrast, the S&P 500 index has a P/E ratio of 22, while the Nasdaq 100 index has a multiple of 27. These indices always trade at a premium because of their tech-heavy investments, including companies like NVIDIA and Microsoft. 

The SCHD, on the other hand, has no major tech exposure, with the biggest holdings in the fund being Bristol Myers Squibb, Blackrock, Cisco Systems, Home Depot, Chevron, and Texas Instruments. 

Therefore, the SCHD ETF will likely continue rising as it attempts to close the valuation gap with the S&P 500 index.

Earnings are doing well

The SCHD ETF will also do well in the long term because of the ongoing earnings trends. Data by FacstSet shows that corporate earnings were strong in the third quarter. With 91% of all companies in the S&P 500 index having released their results, the blended earnings growth was 5.3%. If this will be the final figure, it will be the fifth consecutive quarter of earnings growth.

Notably, FactSet notes that the healthcare sector has had the biggest jump in earnings, which is a notable thing since it is the second-biggest sector in the fund. Financials, consumer staples, and industrials have also been strong performers this year. 

Therefore, this earnings growth will likely continue in the foreseeable future, which will support the SCHD and other ETFs.

Federal Reserve, tax cuts, and deregulation

The SCHD ETF could also do well because of the Federal Reserve, which has maintained a relatively dovish tone in the past few months. It has slashed interest rates by 0.75% this year, a trend that may continue in the coming months.

Historically, stocks do well when the Fed is cutting interest rates since it moves investors from other low-risk assets like money markets to equities. 

At the same time, the stock market will likely do well because of Trump’s policies of deregulation and tax cuts. On deregulation, chances are that his administration will be more open to mergers and acquisitions than during Biden’s term. 

These stocks could continue soaring, mirroring what happened during his first term before the COVID-19 pandemic ended the momentum. Trump also wants to cut taxes and simplify the tax code, meaning more earnings for companies.

Potential risks for the Schwab US Dividend ETF

There are several potential risks for the SCHD ETF. First, there is a risk of a sustained trade war if Trump follows through his threats on tariffs. He has pledged to impose tariffs on most imports, which he expects will fund his large tax cuts. As such, stocks may pull back since investors don’t love uncertainty.

Second, there is a risk that, as shown below, the SCHD has formed a rising wedge pattern, a popular bearish reversal sign. This pattern is made up of two converging trendlines. At the same time, the MACD indicator has formed a bearish divergence pattern, a popular bearish sign in the market. The Relative Strength Index (RSI) has also pointed downwards, a risky sign.

Third, there is a risk that the ETF, which has been in a strong bull run for a long time, will retreat as the rally takes a breather.

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