VYMI: Not Your Typical International ETF – Vanguard International High Dividend Yield ETF (NASDAQ:VYMI)


Vanguard International High Dividend Yield Index ETF (NASDAQ:VYMI) is a low cost (0.32% expense ratio) passive investment option for investors seeking exposure to relatively high yield foreign equities. While there are considerable merits to such a strategy, not all index-huggers are created equal, and it’s important to look under the hood to determine whether those distinctions are significant, and identify what the underlying risks are. After doing my analysis, I’ve determined that this ETF is a solid option for those looking for income-focused international large value exposure, though there are some specific sector risks to bear in mind.

Within the context of modern portfolio theory, it’s the allocation of assets (and sectors within equities, drilling down a bit deeper) that is of paramount importance, rather than specific equity/investment selection. Essentially, factor risk is the main concern, and for investors of this mindset, VYMI is a good representative fund for its related index. MPT suggests that overall portfolio risk-adjusted performance depends on finding the best combination of factor weights, and within that investment framework, VYMI does exactly what investors would hope for. For active fund investors seeking alpha (I couldn’t resist) for their individual funds, this is not the ETF for you.

(Image source: ‘Retirement Planner’ website)

Fund Overview

With $1.38 billion in assets, VYMI is a relatively small fund within the Vanguard fund family. It’s all relative, though, given that the fund has only been around since February 2016, and that Vanguard is the 2nd largest asset manager in the world with roughly $6 trillion in assets (BlackRock (NYSE:BLK) is 1st with about $7 trillion). One of the reasons for the impressive fund flows is that there aren’t that many funds available that specifically focus on high-yield international stocks, and the ones that do tend to have relatively high expense ratios, which is typical of more exotic fund categories in general. The difference in cost can be very significant, as the graphic from Vanguard’s website below clearly shows:

VYMI cost comparison(Image source: Vanguard VYMI ETF overview)

When looking at the 3-year annual return of VYMI vs. the category average (5.93% vs. 4.87%), the cost difference is even more compelling. That 1.06% outperformance very closely resembles the 0.81% cost savings (1.13%-0.32%), showing the ultimate significance of costs on returns.

Portfolio Details

Looking more closely at the fund, you can start to notice some subtle differences between it and the rest of the international large value category. While staying true to its underlying index, portfolio diversity relative to peers is somewhat lacking. VYMI’s exposure to financial services is very high, standing at 34.8%, vs. the category average of 23.73%. Healthcare, meanwhile, is underrepresented in the portfolio, comprising just 5.23% of assets vs. 9.36%. Furthermore, the fund has much higher emerging markets exposure than peer funds, which adds another layer of systemic risk.

VYMI sector exposure(Table source: Morningstar VYMI ETF page)

There is no specified limit to individual sector exposure for the fund, and as the underlying index dictates its sector weights, high concentrations can result. Certain sectors can have outsized representation within an index (the classic examples being financial/banking stocks in the S&P 500 just prior to the financial crisis of 2009, and internet stocks within the Nasdaq bubble of 2000), so this unconstrained passive approach comes with attendant risks. Looking at its geographic makeup, similar issues begin to surface. As of year-end 2019, VYMI had a roughly 22% stake in emerging markets (‘EM’) stocks, compared to just about 10% for the category. EM equities are traditionally more volatile than developed country stocks, so investors looking for a more traditional dividend-focused international fund may want to reexamine their portfolio needs, to determine whether or not they are getting what they really asked for.

VYMI geographic snapshot(Image source: Vanguard VYMI ETF overview)

While the fund seeks to replicate the performance of the FTSE All-World ex US High Dividend Yield Index, it is not an exact replica or 100% accurate proxy. Instead, this ETF invests by sampling the index, “holding a broadly diversified collection of securities, that, in the aggregate, approximates the full index in terms of key characteristics.” When you actually look at the metric comparison, though, the fund managers have done a truly remarkable job of mirroring the index, even without being a pure index fund, as the table below shows:

VYMI index comparison(Image source: Vanguard VYMI ETF overview)

Given its passive approach, VYMI does not have any screening methodology for firm profitability or quality. In less liquid markets (such as emerging and frontier markets) this can be particularly significant, as active management may be increasingly necessary to separate the wheat from the chaff in markets where financial transparency is sometimes lacking, and regulatory hurdles can be burdensome and opaque. That said, the low cost, low portfolio turnover (15% in 2019 was the highest mark since inception), and wide investment reach (the portfolio consists of 970 different stocks currently), help compensate for the downsides of passive investing.

Looking more specifically at the stocks in VYMI (as of 12/31/2019), one can see the deep value makeup of the portfolio. The following table illustrates the point:

VYMI style measures(Table source: Morningstar VYMI ETF page)

As you can see, the P/E is below the category average, at 11.03 vs. 11.89. P/CF is also lower than the category mean, coming in at 4.42 vs. 5.39. The long-term earnings growth rate is also lower than the category average, at 6.94% vs. 7.39%. Perhaps most importantly, given the investment objective of the fund, the dividend yield is significantly higher than both the category average and the underlying index, at 5.05% vs. 4.22% and 4.59%, respectively. Given these metrics, VYMI is essentially a large cap deep-value fund with high exposure to financials and energy. That may be perfectly appropriate, depending on one’s investment objectives and portfolio needs, but it’s important to know what you’re actually getting; the high dividend yield is only half the story.


If you’re looking for a high alpha fund with targeted exposure to international equities with high dividends, this is NOT the fund for you. However, if you’re more interested in making your portfolio more closely resemble global markets, with an eye towards high yielding stocks, at a low price, then VYMI is a great choice. Just make sure you understand the sector, geography, and style risks that are somewhat unique to this fund. Under my own personal ‘Core and Explore’ approach to portfolio management, which utilizes passive funds for the majority of assets (‘core’), and active funds for the ‘explore’ portion (which tends to cover less liquid market areas, where market replication is less ideal), I would opt for a fund that actively manages its portfolio and screens for investment quality. That said, for those simply looking for high yield international equity and high yield exposure, this low-cost fund is a very worthy contender for your investor dollars, and I recommend it with some confidence. It really all depends on what your specific investment objectives are.

VYMI return chart(Image source: Vanguard VYMI ETF overview)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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