SCHH Vs. SCHD: I Prefer SCHD For Its Lack Of REIT Exposure

An analyst forecasts persistently high borrowing rates, citing inflation, trade disputes, and Moody's recent U.S. credit rating downgrade. In this environment, the Schwab U.S. Dividend Equity ETF (SCHD) is favored due to its lack of exposure to REIT and utility stocks, which is deemed advantageous. Additionally, SCHD's current dividend yield spread presents a more attractive relative valuation compared to the Schwab U.S. REIT ETF, positioning it as a preferred investment.

Analysis

The analysis posits that persistently high borrowing rates are increasingly likely, driven by a confluence of inflation, trade disputes, and the recent U.S. credit rating downgrade by Moody's. Within this macroeconomic framework, the Schwab U.S. Dividend Equity ETF (SCHD) is identified as a strategically advantageous investment. Its key strength lies in its portfolio construction, specifically its lack of exposure to rate-sensitive sectors such as Real Estate Investment Trusts (REITs) and utilities, which typically underperform in high-interest rate environments. Further supporting this thesis, the current dividend yield spread between SCHD and the Schwab U.S. REIT ETF (SCHH) suggests a more attractive relative valuation for SCHD, signaling a potential for outperformance.

Key Decisions for Investors

• Investors anticipating sustained high interest rates should consider overweighting dividend equity ETFs like SCHD that have minimal exposure to rate-sensitive sectors.
• Evaluate the relative valuation between dividend-focused funds and REITs, using metrics like the dividend yield spread between SCHD and SCHH as a potential signal for tactical allocation.
• Closely monitor the primary drivers cited—inflation data, trade policy shifts, and sovereign credit sentiment—as any significant change could invalidate the thesis favoring dividend equities over REITs.