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ETFs

Why Vanguard High Dividend Yield ETF Is Outperforming in 2022

Low costs and an emphasis on more profitable firms have given the ETF an edge over its peers.

Vanguard High Dividend Yield VYM strikes a good balance between yield and risk. Weighting stocks by market cap steers the fund toward more stable, large-cap stocks and away from those whose dividends may be distressed. It earns a Morningstar Analyst Rating of Silver.

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. Focusing on dividend yield gives the portfolio a value orientation and can open the portfolio to risk. High dividend payouts could limit the earnings these companies have to reinvest in their businesses, dimming their growth prospects.

Value traps, or stocks with deteriorating fundamentals and declining prices, may pose a significant risk to dividend funds. But this strategy limits its exposure to these risky companies. Sweeping half of the dividend-paying universe into its portfolio diversifies stock-specific risks, which limits the influence of distressed firms. It also weights constituents by their market cap, an approach that 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 3.08% still surpassed the Russell 1000 Value Index by more than 1 percentage point. Stability extended to performance as well, with the fund experiencing a five-year standard deviation 11% lower than its bogy.

Similar to other dividend-focused funds, this fund’s sector composition can deviate substantially from the category index, owing to its yield orientation. While market-cap weighting often keeps these differences small, the fund can still exclude a significant portion of the market under extreme conditions. Between 2010 and 2018, for instance, the fund’s allocation to financial stocks was anywhere from 15-20 percentage points below the Morningstar Category average. This is an artifact of the post-global-financial-crisis dividend cuts across much of the sector. While this did not hurt the fund’s relative performance significantly, there is no guarantee this sort of bet will materially harm or help its performance.

Key Proprietary Morningstar Metrics for Vanguard High Dividend Yield ETF

Morningstar Analyst Rating: Silver

Process Pillar: Above Average

People Pillar: Above Average

Parent Pillar: High

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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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