Last year, the Federal Reserve was a thorn in the side of dividend exchange traded funds. This year, that trend has reversed for the better as market participants have come to grips with the fact that the U.S. central bank probably will not be able to raise interest rates any more than two times.
That has been a boon for dividend ETFs, particularly those emphasizing high dividend strategies. There are some venerable options in this space that are not as high yield as their names imply, which can help these funds remain durable regardless of what the Fed is doing.
The Vanguard High Dividend Yield ETF (NYSEArca: VYM) has been solid during some trying times for dividend stocks and 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 nearly a quarter 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]
[related_stories]Potential investors should be aware the tax consequences as well. Dividends are passed through to ETF investors and may be taxed as qualified and ordinary income. The providers will publish the percentage of dividends paid that were qualified at the end of the year. ETFs that rebalance semi-annually or annually will lower the chance of non-qualified dividends.
“My premise is that, when the Fed does decide to raise rates, it will be because the US economy has gotten consistently stronger. While raising rates might be a negative for dividend funds, the companies that make up the funds should be performing better than ever under a stronger US economy. Therefore, I expect the earnings and dividend payouts of these firms to rise, providing an overall net gain for the fund,” according to a Seeking Alpha analysis of VYM.
VYM charges just 0.09% per year, making it less expensive than 92% of comparable funds.
Vanguard High Dividend Yield ETF
