Vanguard High Dividend Yield Index Fund ETF Shares VYM

Vanguard High Dividend Yield strikes a nice balance between higher-yielding stocks and distressed yield traps. Its ability to manage risk should provide an advantage over most of its Morningstar Category peers.

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. Yield traps, or stocks with untenably high dividends, pose a significant risk to dividend funds. But this strategy limits its exposure to risky companies. Sweeping half 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 yield traps because their weight drops as their prices fall.

Leaning toward stable companies comes at the cost of maximizing dividend yield. But the fund's yield still typically surpasses the Russell 1000 Value Index by about 1 percentage point. Stability extended to performance as well, with the fund historically experiencing a standard deviation consistently lower than its category bogy.

Like other dividend funds, this portfolio's sector composition can deviate substantially from the category index, 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 during extreme conditions. Between 2010 and 2018, for instance, the fund’s allocation to financial stocks was anywhere from 15 to 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. Its 0.06% fee is among the lowest in the large-value category.

Vanguard High Dividend Yield casts a wide net and uses market-cap weighting to rein in risk, delivering a competitive yield and strong risk-adjusted performance. These features underpin the fund’s High Process Pillar rating.

The fund tracks the FTSE High Dividend Yield Index, which captures the highest-yielding half of the large and mid-cap dividend-paying stock universe. The index starts with the FTSE USA Index and ranks its constituents by their projected 12-month yield. It then adds stocks by descending rank until it captures 50% of the dividend-paying universe’s market cap. As it aims for 50% market-cap coverage of this cohort, the fund tends to sweep in about 400- 450 stocks, but that number increased to more than 550 in 2025 owing to the concentration of the US stock market. Companies that have not paid dividends in the past 12 months or are not expected to pay one in the next 12 months are not eligible. REITs are also excluded.

The index implements buffer rules at its semiannual reconstitution. Current holdings will stay in the index until their yield falls below the 55th percentile, while new entrants can only be added after their yield passes the 45th percentile. This has helped keep a lid on turnover:

This strategy has delivered on its high-yield objective. Historically, its trailing 12-month dividend yield has been about 1 percentage point higher than the Russell 1000 Value Index.

Diversification remains central to this strategy despite prioritizing dividend yield. This portfolio typically holds over 500 stocks while hovering around 25% of assets in its top 10 holdings in recent years. Large companies with steady earnings headline the portfolio, including industry leaders Johnson & Johnson, The Home Depot, and JPMorgan Chase & Co.. These types of companies tend to smooth out return volatility over the long term.

Vanguard's equity index group earns an Above Average People Pillar for its well-supported and stable management team adept at leveraging Vanguard's comprehensive resources. Its portfolio managers benefit from the firm's global infrastructure and advanced portfolio management technology, which facilitates cost-efficient trading around the globe. The infrequent turnover of managers, coupled with Vanguard's practice of rotating them across various funds, enhances their expertise and understanding of different market segments.

The fund's managers directly handle trading, providing them with deeper insights into the portfolio's operations than a stand-alone trader might have. They are backed by a global team of dedicated personnel and employ sophisticated, scalable technology to minimize their workload and enhance tracking accuracy. Vanguard's independent risk-management team plays a crucial role in ensuring its funds adhere to predetermined tracking tolerances. It collaborates closely with the managers to oversee trades and address potential issues proactively. Vanguard compensates managers based on tracking error and excess return metrics to foster a culture of accountability and ensure that the management team's interests are closely tied to investors'.

Vanguard maintains its High Parent Pillar rating as it continues to grow under new leadership.

CEO Salim Ramji has had a busy first year captaining Vanguard’s crew, and the ship remains pointed in the right direction. The firm made its largest round of fee cuts in early 2025, which came at an estimated cost of USD 350 million. It established a separate division dedicated to its advice and wealth management efforts, a sign that it wants to seriously compete within those lines of business. Asset growth has continued to be a huge success. Only BlackRock’s inflows rival the money Vanguard is taking in. Likewise, the number of clients it serves has more than doubled since 2015.

Despite that success, an ever-growing number of clients has presented a challenge: Vanguard can’t grow its services fast enough to keep up with demand. In some instances, it has had to curb certain services and capabilities or raise fees on others to cope, causing some loyal clients to criticize what they perceive as deteriorating services.

Vanguard has ambitions to bring its disruptive legacy to the bond market. It created roughly a dozen low-cost bond exchange-traded funds for US investors and several others abroad over the 12 months through June 2025. All have low fees in their respective categories, and the actively managed strategies align with Vanguard’s philosophy. They are relatively easy to understand and are conservatively managed.

Vanguard has another opportunity to prove that clients are still its priority. On the surface, its endeavor into the high-fee deal-making world of private assets alongside Wellington and Blackstone looks like a cultural mismatch. So far, the collaboration hasn’t produced anything that’s concerning.

Emphasizing large, profitable dividend-payers helped this fund weather stormy markets better than the Russell 1000 Value Index. Since its 2006 inception, the fund beat its benchmark by 1.20 percentage points annualized with lower volatility, putting the fund even further ahead of its bogy in risk-adjusted terms.

This fund has beaten its category index consistently since inception. Outperformance during stress periods has been a hallmark. For example, this fund beat its category benchmarek by 3.62 percentage points during the coronavirus-driven selloff between Feb. 19, 2020, and March 23, 2020. This fund's advantage grew during rocky markets in 2022, with the fund besting its category bogy by over 7 percentage points over that period.

But this fund isn't immune to drawdowns. It still fell 34% in the pandemic selloff and dropped 0.42% in 2022. However, it should continue to carve out an edge over its category index and peers over the long run thanks to low costs of ownership and a solid strategy.

Vanguard High Dividend Yield ETF's Prospectus Adjusted Expense Ratio is 0.04% per year. It places it in the cheapest quintile of the Morningstar US Fund Large Value Category, where the median fee is 0.75% per year. This cost positioning translates into a Medalist Rating Price Score of 2.46, which reflects its relative price positioning within the category. The Price Score ranges from -2.50 (most expensive) to +2.50 (cheapest), with higher scores indicating better cost competitiveness.