Vanguard High Dividend Yield strikes a balance between higher yield and the inherent risks. Weighting stocks by market cap steers the fund toward more stable, large-cap stocks and away from those whose dividends may be distressed. Its consistently strong risk/reward profile underpins its Process Pillar rating upgrade to High from Above Average.

This fund tracks the FTSE High Dividend Yield Index. It starts with large- and mid-cap stocks in the FTSE USA Index, excluding REITs, and ranks them by their expected dividend yield over the next 12 months. The index selects those representing the higher-yielding half of eligible dividend-paying stocks. Selected holdings are weighted by float-adjusted market cap, pulling the portfolio toward larger, more stable stocks. 

Focusing on dividend yield gives the portfolio a value orientation that can open the portfolio to risk. Value traps, or stocks with deteriorating fundamentals and declining prices, pose a significant risk to dividend funds. But this strategy limits its exposure to risky companies. Sweeping half of the dividend-paying universe into its portfolio diversifies stock-specific risks and limits the influence of distressed firms. Market-cap-weighting also emphasizes larger, more stable firms that should have the capacity to continue making dividend payments. This mitigates the impact of value traps because their weight drops as prices fall.

Leaning toward stable companies comes at the cost of maximizing dividend yield. But the fund's yield of 3.10% still surpassed the Russell 1000 Value Index by over 1 percentage point as of August 2023. Stability extended to performance as well, with the fund experiencing a five-year standard deviation 8% lower than its category bogy.

Similar to other dividend-focused funds, this fund's sector composition can deviate substantially from the category index's, owing to its yield orientation. Market-cap weighting normally keeps these differences small, but the fund's yield screen can still exclude a significant portion of the market in extreme conditions. Between 2010 and 2018, for instance, the fund's allocation to financial stocks was anywhere from 15-20 percentage points below the category average. This is an artifact of the post-financial-crisis dividend cuts across much of the sector. While this did not hurt the fund's performance significantly, sector bets tend to be an uncompensated risk.

This fund's cost-conscious approach sets it apart from the crowd. The 0.06% fee for its exchange-traded fund share class is among the lowest in the large-value Morningstar Category.

Analyst Rating

A steady approach to higher yield.

Director

Bryan Armour

Exxon Mobil

JPMorgan Chase & Co

Johnson & Johnson

Broadcom

Procter & Gamble

Home Depot

Chevron

Merck

AbbVie

PepsiCo

Vanguard High Dividend Yield casts a wide net and uses market-cap-weighting to rein in risk. It delivers a competitive current yield while sporting strong fundamentals, which has consistently benefited risk-adjusted performance. These features underpin the fund’s Process Pillar rating upgrade to High from Above Average.

High

Process

The Vanguard equity index group boasts seasoned managers and a dedicated supporting staff well-equipped to provide tight index tracking, earning it an Above Average People rating.

Gerard O'Reilly and Nick Birkett comanage this strategy. O'Reilly, a principal at Vanguard, has been with the firm since 1992. Birkett, who has been with Vanguard since 2017, replaced William Coleman on this strategy in February 2023. O'Reilly has been a named manager on this strategy since 2016. Vanguard frequently rotates its managers to promote breadth and depth across the team—we do not expect the manager change to disrupt the strategy in any way.

The managers are responsible for the fund's trading, providing more portfolio insights than a stand-alone trader. They are supported by a global team of dedicated personnel and sophisticated, scalable technology that optimize precision and reduce managers' workload. Vanguard's independent risk management team works closely with the managers to monitor trades and review any potential issues. Managers' compensation is tied to performance using a combination of tracking error and excess return metrics, which aligns their interests with investors'.

Above Average

People

The Vanguard Group retains a High Parent rating. 

Mutual ownership, low costs, and a direct-to-investor playbook have helped spur Vanguard's leadership within the United States. Client service missteps notwithstanding, Vanguard over the past decade has grown its market share of U.S. open-end and exchange-traded fund assets at about a 5% annualized clip. At that rate, Vanguard's portion of the U.S. industry will cross 50% around 2035.

True, some competitors can now match or even undercut Vanguard on fees for broad market exposure. But Vanguard's burgeoning advice business could help it keep or even extend that lead. Through Digital Advisor and Personal Advisor Services, Vanguard has built an increasingly compelling ecosystem of advice for investors with simple to complex needs.

Vanguard is also using its advice business to expand overseas, but that's a work in progress. Of Vanguard's USD 7.6 trillion in global assets under management in March 2023, non-U.S. investors owned less than 10%, a figure that has changed little in recent years. Strategic shifts in China and other markets account for the slow pace, including returning money to institutions that had been layering on fees. Vanguard hopes to recoup that money and more by focusing on individual investors and the advisors who serve them. Provided Vanguard sticks to its playbook, its advantages should translate into success abroad, too.

Parent

Vanguard High Dividend Yield ETF

VYM tracks the FTSE High Dividend Yield Index. The index selects high-dividend-paying US companies, excluding REITS, and weights them by market cap.

I have owned VYM since the end of 2017, but after looking at the appreciation and income statistics, VYM is not as appealing as it once was. To be fair, I have no intention of selling VYM. But if I was going to build the ETF basket again, I would redirect the capital allocated to VYM.

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Investors could be sensing that the tumult in the bond market could be over, pushing them back into the debt market with renewed confidence. It makes sense if prices are depressed to a point where they're too good to simply pass up.

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Two ETFs, all-cap blend SCHB and high dividend VYM have traded with an outsized volume last day.

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The current bond market rout has left investors scurrying for alternative investment options that offer good yields.

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During Exchange, the recent conference, many wondered what to do with client bond funds in the face of rapidly rising rates. On this week's ETF Edge, host Bob Pisani spoke with ETF Trends' director of research, Todd Rosenbluth, and John Maier, CIO for Global X ETFs, to discuss this topic of bond alternatives and more.

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Cummins

MDU Resources Group

Scotts Miracle-Gro

Dividend increases have been plenty. I have a strong feeling and indication that 2022 will be another fantastic year for dividend investors.

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Bonds of course are a de-facto option when it comes to getting safe haven exposure when equities have been moving the way they have so far this year. However, for harvesting more yield, there are options for fixed income investors.

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The old adage of “no risk, no reward” can certainly ring true for the yield. It can also apply to the current market environment where bond yields may not be sufficient for fixed income investors, which makes dividends an option.

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News for Vanguard High Dividend Yield ETF ETF (VYM)