Soft Rotation Underway: Why Capital Is Quietly Flowing from Tech Into Dividend ETFs

There's no doubt about it: Artificial intelligence (AI) stocks and exchange-traded funds (ETFs) aren't going anywhere. However, momentum may be slowing in some sectors as capital drifts toward dividend ETFs and value-oriented equities. Rather than a full-blown "exit" from tech, think of it more as a soft rotation toward dividend-producing properties.

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From AI euphoria to "I'd like my money now, please"

After years of mega-cap tech and AI investments dominating the market, investors have begun to ask three questions:

1. When will AI begin to pay off in a real way?
2. When will the staggering growth associated with AI begin to slow down?
3. Am I willing to pay for future cash returns from AI investments, or would I rather put my money in an ETF with a proven track record of paying dividends?

No one doubts that some AI companies can make money for themselves and their shareholders. Still, AI and chip leaders face massive capital-expenditure burdens to build data centers and other infrastructure, raising concerns about how much free cash flow will be left for shareholders.

Schwab's top ETF and the soft rotation

Ending a multi-year trend of growth dominance, one need look no further than dividend ETF flows to identify a noticeable rotation. In Q1 alone, dividend funds attracted $24.1 billion in inflows. While projections vary as to how much the total will be by year's end, it's likely to be record-breaking.

Among the most popular dividend-paying funds is the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). SCHD tracks companies known for paying high dividends, which may appeal to investors concerned about when AI will pay off.

The fund seeks to replicate the performance of the Dow Jones U.S. Dividend 100 Index. In addition to focusing on dividend-paying companies, SCHD also includes companies with potential for capital appreciation. However, with 101 holdings, SCHD reduces risk by not giving any holding too much weight. If one -- or even a handful -- of its holdings hit a rough patch, its relatively small weight means it's unlikely to do real damage to the overall fund.

While past performance can't predict future results, SCHD has historically delivered solid returns in both capital appreciation and dividends paid.

What's in it for investors?

This rotation suggests that investors are rebalancing their portfolios by investing in ETFs that may provide a combination of stability, growth, and a balanced income. And if inflation stubbornly refuses to come down and rates remain firm, investors may continue to favor dividend strategies for the remainder of 2026, allowing them to get paid along the way.

Dana George has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.