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The Vanguard High Dividend Yield ETF (NYSE: VYM) is already one of the largest domestic dividend exchange traded funds and the fund is continuing to grow thanks to more than $2 billion in year-to-date inflows, but understanding why investors are fond of this fund is as important as knowing that VYM continues attracting assets.
VYM, which tracks the FTSE High Dividend Yield Index, is up 14.62%. Yes, that lags the S&P 500 and other major domestic equity benchmarks, but investors' fondness for the Vanguard fund can be attributable to its reduced volatility relative to standard indexes and its 3.12% dividend yield.
These days, 3.12% may be considered “high” in yield terms, but it's not so high that investors are forced to ponder potential dividend cuts among the fund's components. In fact, it's not a stretch to say that few if any of VYM's holdings are credible near-term dividend offenders and the same is true of most if not all of its top 10 holdings, a group that combines for 26.50% of the fund's roster.
Why It's Important
Additionally, VYM's market capitalization weighting steers the fund toward large- and mega-cap companies with strong balance sheets and away from firms that could be dividend cutters.
“But this fund weights its holdings by market capitalization, which tilts it toward relatively larger companies that are more likely to maintain their dividend payments,” said Morningstar in a recent note. “Its average market capitalization has historically run higher than the Russell 1000 Value Index. Market-cap weighting also cuts back on turnover and the related trading costs.”
Though its positioned as a “high yield” ETF, VYM has no exposure to real estate stocks and allocates just 9.2% of its weight to utilities names. Four other sectors – financial services, consumer goods, health care and technology – command larger weights in VYM than utilities.
A longer-lasting return to value stocks would likely fuel upside for VYM given its value leanings.
“The fund’s focus on dividend yield means it has a value orientation,” said Morningstar. “It ranked among the better-performing funds in the large-value Morningstar Category over the 10 years through August 2019. But value strategies underperformed the wider U.S. market over the past decade and this strategy was no exception. It lagged the Russell 1000 Index by 1 percentage point annually over the same stretch.”
The research firm has a Silver rating on VYM.
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