- The safety-trade of 2022 has been largely reversed this year as investors pile into tech stocks.
- This can be seen in Dividend ETF flows, which have fallen off a cliff in 2023 from a record in 2022.
- Popular dividend ETFs have badly lagged the broader stock market this year as the mega-cap tech stocks surged.
Investors have largely abandoned dividend stocks this year.
Amid the 2022 bear market, investors piled into dividend-paying stocks in hopes of having a buffer on their invested capital in the form of a dividend as the Federal Reserve began to aggressively hike interest rates.
Dividend-paying companies are largely viewed as safer, more stable firms than their non-paying counterparts, and as the stock market plunged more than 20% last year, investors were scrambling for safe havens, and for a brief period of time at least, value and dividend-oriented stocks outperformed the broader stock market in 2022 by falling less than the S&P 500.
The strong demand can be seen via the collective inflows into dividend ETFs last year, which hit a record $62.1 billion. That followed a strong 2021, when $41 billion flowed into dividend ETFs. Altogether, investors purchased more than $100 billion worth of dividend ETFs from 2021 through 2022.
That trend hit a wall this year, with the safety-trade largely reversing as investors have chased mega-cap tech stocks higher. Only three mega-cap tech stocks pay a dividend: Apple, Microsoft, and Nvidia, and the dividend yield on them is so small that they're often not included in dividend ETFs.
So far in 2023, investors have purchased just $786.8 million worth of dividend ETFs, according to data from Bloomberg, representing a 99% decline from last year's record inflows. Instead, investors have been piling into technology stocks amid an AI frenzy, with the Nasdaq 100 surging more than 50% this year.
Investors' rejection of dividend ETFs this year is also being driven by their underperformance.
The popular Vanguard Dividend Appreciation ETF is up 9% year-to-date, which is less than half the S&P 500's gain of 20%. Meanwhile, the Schwab US Dividend Equity ETF and the iShares Select Dividend ETF are in negative territory.