The Vanguard High Dividend Yield ETF (NYSEArca: VYM) is one of the four largest U.S. dividend ETFs and one of the least expensive as well. Those are appealing traits, but the venerable ETF could be prepared to deliver more upside for income investors.
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.
Investors may also consider consistent dividend growers as a way to gain exposure to this group of quality companies as dividend growers and high quality stocks share a number of similar characteristics.
VYM “ranks dividend paying stocks by yield (REITs are excluded) and then fills the portfolio until the cumulative market cap of the fund reaches 50% of total available market cap. Since it’s market cap-weighted, the fund ends up primarily being invested in large- and mega-cap stocks. The fund’s current yield of 3.1% easily tops the 1.9% yield of the S&P 500 and the 2.3% rate on the 10-year Treasury note,” according to Seeking Alpha.
VYM charges just 0.09% per year, making it less expensive than 92% of comparable funds. For a “high yield” ETF, VYM’s exposure to the sectors investors view as yield destinations is relatively light, a feature that helps this fund remain firm even when Treasury yields rise.
Given President Donald Donald Trump’s campaign promises, the markets believe a Trump administration could foster growth and fuel inflationary pressures, adding to speculation that the Fed would hike interest rates to rein in an overheating economy.
Consequently, many expect higher yields and a steeper yield curve are on the horizon. While income seekers may welcome the prospects, bond market yields may continue to remain in the low end of the spectrum.
“Second, those low Treasury rates make dividend yields that much more attractive. The High Dividend Yield ETF holds around an 80 basis point advantage over the 10-year note. That’s probably enough of a difference for yield seekers to stick with equities for now but watch for what the Federal Reserve does. If it follows through on its forecast to raise rates two more times in 2017, that gap will likely close and could cause investors to move back to fixed income,” according to Seeking Alpha.
For more news and strategy on the Dividend ETF market, visit our Dividends category.
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.