VYM: Decent ETF For Investors Focused On Growth, But Dividend Investors Can Do Better

Investing strategies have to evolve as market conditions change. When the S&P 500 and most of the broader indexes were going up at 10% a year, allocating capital was easier, but market conditions have become much more volatile over the last two and half years.

One ETF that has consistently performed well over the last decade despite offering minimal income is the Vanguard High Dividend Yield Fund (NYSEARCA:VYM).

This Vanguard fund has performed well over the last 8 years but this ETF has also offered minimal income despite achieving solid total returns. This fund has also risen an impressive 11.06% per year over the last 10 years. Still, the five-year dividend growth rate of this fund has been just 6.25%, and the current yield is 2.94%.

The Vanguard High Dividend Yield fund’s holdings are 20.85% financials, 15.28% health care, 13.35% consumer defensives, 10.74% energy, 10.32% industrials, 7.85% technology, 7.11% utilities, 6.62% consumer cyclicals, 4.08% basic materials, 3.79% communication, and .001% real estate. This exchange traded fund invests almost exclusively in large cap companies. The four largest holdings of this ETF are Johnson & Johnson (JNJ), Exxon Mobil (XOM), JPMorgan Chase (JPM), and Chevron (CVX). This fund has an expense ratio of .06%, a yield of 2.94%, and $50.47 billion dollars in assets under management.

The main reason this ETF has performed well over the last decade is because of the fund’s overweight position in large cap technology and financial companies. This ETF is not, however, positioned well in the current inflationary environment, since the fund is underweight the energy and commodity sector. This Vanguard fund has just 14.82% invested in the energy and commodity sector, and many of funds largest holdings in the consumer defensive sector, this ETF is overweight, such as Procter & Gamble (PG), which have been hurt by rising costs. This Vanguard fund has the high allocation to financial stocks, and growth investors who want significant exposure to this sector will likely find this ETF appealing.

This is an ETF that growth investors will likely find appealing since the funds has 38% of its capital allocated to large cap financial, technology, and industrial stocks. Dividend investors will likely be disappointed though, since this fund has minimal exposure to the energy and commodity sector, and this ETF’s 5-year dividend growth rate of 6.25% has also already been below average compared to other income and dividend focused ETFs such as the iShares Select Dividend ETF (DVY) and the iShares Core Dividend Growth Fund (DGRO). The fund’s current 2.94% yield is also well below the current rate of inflation.

The Vanguard High Dividend Yield fund overall has performed in-line with most of its peers, such as the iShares Select Dividend ETF and the iShares Core Dividend Growth Fund. The best performing large cap ETF focused on in and dividends has by far been the Schwab U.S. Dividend Equity ETF (SCHD). This Schwab fund has outperformed the Vanguard ETF by nearly 45% over the last decade, and both funds have paid nearly the same average annual yield of 3%. VYM has offered solid total returns but minimal income over the last decade, since this ETF has risen 11.06% per year over the last ten years, but the dividend growth over the last five years has been just 6.24% per year.

Growth investors who are looking for a fund that takes moderate risk and want to be overweight the financial sector will likely find this ETF appealing, but dividend investors focused on inflation adjusted income will likely be disappointing with this Vanguard ETF. VYM is also unlikely to offer inflation adjusted income or dividends moving forward since this ETF has minimal exposure to the energy and commodity sectors. This Vanguard fund is heavily overweight the financial sector, so this ETF is also likely to be more volatile than most exchange traded funds as well. While some investors will likely find this fund appealing, most seeking income and dividends will find better value in ETFs such as the Schwab US Dividend Equity Exchange Traded Fund.