In 2022, the safety-trade trend was reversed as investors shifted their focus to tech stocks, causing a substantial decline in Dividend ETF flows from the previous year’s record. Dividend ETFs, including popular ones, have struggled to keep pace with the broader stock market this year as mega-cap tech stocks experienced a surge.
Investors’ abandonment of dividend stocks in 2023 is a stark contrast to the previous year’s bear market, during which investors flocked to dividend-paying stocks for the security of potential dividends amid aggressive interest rate hikes by the Federal Reserve. The appeal of dividend-paying companies as safer, more stable investments led to strong inflows into dividend ETFs in 2022, reaching a record $62.1 billion.
However, the safety-trade dynamic shifted dramatically this year as investors favored mega-cap tech stocks, leading to a significant decline in dividend ETF purchases. Only three mega-cap tech stocks, such as Apple, Microsoft, and Nvidia, pay a dividend, with a small dividend yield that often excludes them from dividend ETFs.
In 2023, investors’ rejection of dividend ETFs is further fueled by their underperformance compared to the broader stock market. The popular Vanguard Dividend Appreciation ETF has seen a 9% year-to-date increase, less than half the S&P 500 gain of 20%. Meanwhile, the Schwab US Dividend Equity ETF and the iShares Select Dividend ETF are in negative territory.
The shift away from dividend stocks is reflective of the current trend in the market, as investors have been drawn to the technology sector amid an AI frenzy, propelling the Nasdaq 100 to a more than 50% surge this year. As a result, the appeal of dividend stocks and ETFs has waned, signifying a broader shift in investment preferences.
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