Schwab Long-Term US Treasury ETF

SCHQ

Market cap $838M

Not every dividend ETF you buy needs to be boring.

Schwab Long-Term U.S. Treasury ETF offers low-cost exposure to long-maturity U.S. Treasuries, tracking the Bloomberg US Long Treasury Index. SCHQ provides attractive current income due to elevated long-end yields, but its long duration makes it sensitive to rising rates and curve steepening. Recent yield curve dynamics show a bear steepening, increasing risk for SCHQ as the long end rises faster than the 10-year segment.

We think the Fed has time to assess the impact of tariffs, and we expect it to wait to cut rates until the data show that tariffs are impacting the real economy. So far, there are no signs of recession in the hard data. The tariff pause offers the possibility to avoid worst-case economic scenarios before the damage is crystalized. We believe technical factors will continue to drive market dislocations in spreads and sectors, and that active managers can navigate this more effectively.

SCHQ's fund price has stabilized but remains rangebound due to the Federal Reserve's cautious rate cut approach amidst high U.S. government debt. The Federal Reserve's slow rate cuts, driven by high U.S. debt and potential inflation, limit SCHQ's capital appreciation prospects. Rising U.S. government debt and potential increased spending under the new administration will likely keep interest rates elevated.

The ECB cut rates by 25bp as widely anticipated, but a slightly hawkish tilt bear flattened the EUR curve, which in our view remains priced aggressively. In the US, as the markets head towards the Fed's first rate cut, the probability of a larger cut rose slightly on Thursday.

Investors took refuge in short-term Treasury bonds throughout 2023, where they reaped the rewards of higher-yielding money markets. Meanwhile, longer duration Treasuries have been mired in a bear market since 2020 but could finally start to see a reversal of fortune.

Recent economic data supports a bullish view of long-term US bonds. The structural argument for high debt and deficit sustainability driving thesis. Introduction of a low-cost alternative to TLT - Schwab Long-Term U.S. Treasury ETF.

It generally takes a few years for changes in Federal Reserve rates to fully impact bond fund dividends. Bond funds are still benefitting from prior rate hikes. Perhaps by enough to cancel out any future rate cuts. By my estimations, and under current Fed guidance, most bond funds would only start to see declining dividends in 2025, at the earliest.

The Schwab Long-Term US Treasury (SCHQ) and the iShares 20+ Year Treasury Bond (TLT) ETFs have jumped sharply in the past few months as investors cheer the change of tune from the Federal Reserve.