ETF Trends
ETF Trends

As indicated by its $15.6 billion in assets under management at the end of February, the Vanguard High Dividend Yield ETF (NYSEArca: VYM) is one of the most popular dividend exchange traded funds. VYM’s recently lethargic performance could give investors an opportunity to buy into this cost-efficient dividend ETF behemoth.

For a “high yield” ETF, VYM’s exposure to the sectors investors view as yield destinations is relatively light. Staples, utilities and telecom combine for 26.1% of the ETF’s weight with over half that coming from staples names. That is to say that with its relatively light combined allocation to the telecom and utilities sectors, VYM is not as sensitive to rising interest rates as some utilities-heavy dividend ETFs are. [The Right Dividend ETFs for Rising Rates Protection]

VYM sports a trailing 12-month dividend yield of 2.72%, which is more than 60 basis points higher than the current yield on 10-year Treasurys. Many of VYM’s 393 holdings are not just dividend payers, but prolific repurchasers of their own shares as well.

“Many of the companies within the VYM portfolio not only offer a dividend but also reward shareholders via share buybacks. Share buybacks can serve as an effective way to drive shareholder value via returning capital by repurchasing its own stock,” according to a post by Noad Kiedrowski on Seeking Alpha.

VYM’s two largest holdings, Apple (NasdaqGS: AAPL) and Exxon Mobil (NYSE: XOM), a combined 12.6% of the ETF’s weight at the end of February, were two of the largest S&P 500 share repurchasers last year.

VYM offers additional leverage to the shareholder rewards theme via its 12.4% weight to the financial services sector. For example, Dow component J.P. Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) combine for 5.8% of VYM’s weight. J.P. Morgan Chase and Wells Fargo were among the large banks that passed the Federal Reserve’s recent stress tests, which allows the banks to boost buybacks and dividends. [Bank on These Bank ETFs]

“The mitigating risk aspect is exemplified during bear markets where VYM outperformed the S&P 500 4.9% and 8.4%, respectively in 2008 and 2014. VYM provides a compelling investment opportunity for investors seeking diversity across the large-cap space while mitigating risk and attaining a high yield and overall equity appreciation,” adds Kiedrowski.

In a departure from some of its dividend ETF rivals, VYM features an 18.8% weight to the technology sector, one of the largest among dividend ETFs. Apple, VYM’s largest holding has plenty of dividend growth potential due to its pristine balance sheet and $178 billion in cash. Microsoft (NasdaqGS: MSFT), VYM’s second-largest tech holding and third-largest holding overall, has nearly doubled its dividend over the past four years.

Vanguard High Dividend Yield ETF

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.