ETF Trends
ETF Trends

At the end of August, the Vanguard High Dividend Yield ETF (NYSEArca: VYM) had $10.6 billion in assets under management, placing it among the largest U.S. dividend ETFs. VYM is also one of a small number of well-known dividend ETFs that have added new money this year as fears of interest rate hikes have spooked some investors out of dividend funds.

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]

It can be said that VYM belies its high-yield implication because the ETF’s exposure to the sectors investors view as yield destinations is relatively light. Staples, utilities and telecom combine for 26.8% 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]

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]

“The beauty of this ETF, in my opinion, lies on the entire portfolio more than the simple top 10. The portfolio has large allocations just outside the top 10 to major dividend champions like Altria Group (NYSE:MO). They also have heavy positions in some of the big players that have recently fallen out of favor such as Wal-Mart (NYSE:WMT) and McDonald’s (NYSE:MCD). I love these positions for their ability to stabilize the portfolio if the market turns south. While few investors may think of Wal-Mart as a stabilizing force after their declines over the last year, I think investors are simply showing far too much fear about margin compression,” according to a Seeking Alpha post.

VYM is home to 436 stocks. Top 10 holdings include Dow components Exxon Mobil (NYSE: XOM), Microsoft (NasdaqGS: MSFT) and Procter & Gamble (NYSE: PG). The ETF charges just 0.1% per year.

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.