Why We Believe Vanguard High Dividend Yield ETF Stands Out Among the Competition

Key Morningstar Metrics for Vanguard High Dividend Yield ETF

Morningstar Medalist Rating: Gold
Process Pillar: High
People Pillar: Above Average
Parent Pillar: High

Vanguard High Dividend Yield strikes a balance between higher yield and managing the associated risk. Market-cap weighting steers the portfolio toward more stable, large-cap stocks and away from those whose dividends may be distressed.

This exchange-traded 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 ETF 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 their prices fall.

Leaning toward stable companies comes at the cost of maximizing dividend yield. But the ETF’s yield still typically surpasses the Russell 1000 Value Index by about one percentage point. Stability extended to performance as well, with the ETF 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 ETF’s yield screen can still exclude a significant portion of the market during extreme conditions. Between 2010 and 2018, for instance, the ETF’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 ETF’s performance significantly, sector bets tend to be an uncompensated risk.

This ETF’s cost-conscious approach sets it apart from the crowd. Its 0.06% fee is among the lowest in the large value Morningstar Category.

Vanguard High Dividend Yield ETF: Performance Highlights

Emphasizing large, profitable dividend-payers helped this ETF weather stormy markets better than the Russell 1000 Value index. Over the 10 years through September 2024, the ETF beat the benchmark by 1.16 percentage points annualized while exhibiting lower return volatility, putting it even further ahead of its bogy in risk-adjusted terms.

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

But this ETF isn’t immune to drawdowns. It still fell 34% during the covid selloff and dropped 0.42% in 2022. However, this ETF should continue to carve out an edge over its category index and peers over the long run thanks to low cost of ownership and a solid approach to higher dividend yield.

Source link