mirza kadic
It has been almost a year since I last wrote about the Vanguard High Dividend Yield ETF (NYSEARCA:VYM), so I thought it would be timely to check up on the fund and see how it ranks compared to my expanding list of dividend funds that I monitor.
Brief Fund Overview
The Vanguard High Dividend Yield ETF aims to provides a convenient way for investors to gain exposure to companies that are forecasted to pay an above-average dividend yield.
The VYM ETF tracks the FTSE High Dividend Yield Index (“Index”), an index which measures the investment return of companies that are forecasted to pay high dividend yields. VYM’s investment universe excludes REITs and companies currently not paying dividends or are not forecasted to pay a dividend in the next 12 months.
Importantly, the VYM ETF applies additional proprietary screens to the portfolio, although the criteria for these screens are not disclosed in the fund documents.
Vanguard’s low-cost approach has been very successful in garnering assets, with the VYM ETF accumulating almost $50 billion in assets. The VYM ETF charges a rock-bottom 0.06% expense ratio.
VYM Has A Defensive Tilt
Like most of its peers, the VYM ETF has a value tilt, with the fund categorized as Large-Cap Value by Morningstar (Figure 1).
Figure 1 – VYM style allocation (morningstar.com)
Sector-wise, the VYM ETF’s biggest allocations are Financials (20.2%), Consumer Staples (13.1%), Health Care (12.4%), Industrials (12.2%), and Consumer Discretionary (9.2%) (Figure 2).
Figure 2 – VYM sector allocation (vanguard.com)
2023 Has Not Been Kind To Dividend Funds
So far, 2023 has not been kind to dividend strategies, as sectors typically associated with high dividend yielding stocks like Financials, Consumer Staples, and Health Care have lagged the market dramatically (Figure 3).
Figure 3 – Sector performance YTD (sectorspdrs.com)
Part of the problem has been the dramatic rise in interest rates, which has raised the funding costs for many financial companies like banks, hurting their margins. Another issue has been persistently high inflation, which has hurt consumers spending power and hence the sales growth of consumer staples companies (many consumer staples companies have been taking price at the expense of volume growth to maintain margins and sales).
On the other hand, the market indices have been powered by a handful of mega-cap technology companies, commonly referred to as the Magnificent 7. YTD, the Magnificent 7 have combined to deliver 11.8% of the S&P 500’s 15.9% return to August 25, 2023 (Figure 4).
Figure 4 – Magnificent 7 has contributed most of the market’s gains YTD (SPY ETF holdings via koyfin.com)
However, beneath the hood, most large cap stocks are barely up in 2023. For example, the Invesco S&P 500 Equal Weight ETF (RSP) is only up 4.6% YTD to August 24th, dramatically lagging the index (Figure 5).
Figure 5 – RSP historical returns (morningstar.com)
The narrow breadth of the market rally in 2023 have caused many dividend funds like VYM to uncharacteristically deliver only modest total returns YTD. To July 31, 2023, the VYM ETF has only returned 3.5% (Figure 6).
Figure 6 – VYM historical returns (morningstar.com)
Should Investors Stay Or Bail?
Historically, high dividend strategies have delivered solid long-term total returns. However, in the short-run, any investment strategy can suffer from underperformance, and I believe we are in the midst of such an underperformance period for many high dividend strategies.
The key for most investors is to have a well-diversified portfolio, where they have uncorrelated funds and strategies that can deliver returns independently. For example, in addition to holding the Schwab U.S. Dividend Equity ETF (SCHD) as my dividend strategy play, I also own the VanEck Morningstar Wide Moat ETF (MOAT) and the Invesco S&P 500 Top 50 (XLG), so my core equity holdings have tracked the S&P 500 Index so far in 2023.
Therefore, I continue to recommend an allocation to high dividend funds within most investors’ equity portfolios, especially for conservative income-oriented investors.
Updated Ranking Against Peers
However, is the VYM ETF the dividend fund to hold? In my September 2022 article, I compared VYM against the SCHD ETF. Since then, I have formalized my comparison into a proprietary composite scoring spreadsheet and I have added additional peer funds to track and monitor.
Figure 7 shows an updated comparison between VYM and peers.
Figure 7 – VYM vs. peers (Author created with data from Seeking Alpha and Morningstar)
In terms of fund structure, it is really hard to argue against the Vanguard funds, as they have industry-leading expense ratios. However, I would note that I remain slightly concerned about the proprietary nature of VYM’s additional screens and filters. I usually shy away from black box strategies that I cannot pull apart to analyze.
In terms of historical returns, we can see the VYM ETF has delivered middle-of-the pack performance, with 3/5/10Yr average annual returns of 14.3%/8.4%/9.9% respectively to July 31, 2023, ranking it 5th, 7th, and 7th against 12 peer funds.
On risk, the VYM ETF also does not stand out, with 3 and 5Yr volatility and Sharpe Ratios near the middle of the pack.
Finally, in terms of distribution yield, VYM has one of the lower distribution yields available at a trailing 3.2%, ranking it 9 out of 13.
Overall, I do not believe the VYM is a top performing dividend fund. Based on my objective comparison of historical returns, risk, and distribution yields, I believe Schwab’s SCHD and Vanguard’s Dividend Appreciation Index ETF (VIG) are better high dividend candidates.
Conclusion
Overall, I believe my conclusion from a year ago still stands. The VYM ETF is a solid, high-yielding fund by itself, but it does not particularly stand out against its peers. In sport analogies, the VYM is a solid rotation player, but is not a superstar I would entrust my team with.
Overall, I continue to prefer the SCHD ETF or the VIG ETF, as they both have better composite scores in my proprietary ranking. I rate VYM a hold.
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