Venerable Vanguard ETF Stands Tall, Sort of, in 2022

Advisors well know that Vanguard index funds and exchange traded funds are usually easy sells in client conversations due in large part to the firm’s well-deserved low-cost reputation.

Advisors also know that status extends well beyond the issuers most basic equity and fixed income offerings. If there’s a corner of the ETF realm Vanguard is participating in, there’s an excellent it’s offering the products with the lowest fees or close to it.

Low fees are meaningful over the long-term and right off the bat because cost savings keep advisors from being stuck too far behind the eight ball in terms of performance. That’s an issue sure to resonate with nearly all investors because they’re allocated to mutual funds, index funds and exchange traded funds or perhaps all three. Simple math, courtesy of Vanguard, highlights the benefits of low fees.

“At Vanguard you could save $65,936 over 10 years based on Vanguard's average expense ratio of 0.09%, which results in a cost of $15,147 in this scenario, compared with the industry average expense ratio of 0.49%, which results in a cost of $81,083,” according to the fund giant. “Over 20 years, you could save $229,818 based on costs of $54,024 at Vanguard compared with $283,842 at the industry average. Stay invested for 30 years and you could save $600,838 based on costs of $144,510 at Vanguard compared with $745,348 at the industry average.”

VYM Vindicated in 2022

One of Vanguard’s low-cost ETFs is the Vanguard High Dividend Yield ETF (VYM). It sports the requisite low fee – in this case 0.06% per year. That works out to $6 on a $10,000 investment and ranks as one of the lowest expense ratios among all dividend ETFs.

All of that is sure to be of note to clients, but the more demanding among them are going to inquire about performance and rightfully so. As has been widely documented, dividend ETFs of various stripes are outpacing the broader market this year and VYM is certainly part of that group. Year-to-date, as of Oct. 26, VYM is down just 4.9% compared to a decline of 18.6% by the S&P 500. Add to that, the Vanguard ETF’s annualized volatility is almost 600 basis points below that of the broader market.

While it’s positioned as a high-dividend strategy, VYM doesn’t sport an excessively yield nor is it heavily allocated to sectors with potential payout vulnerabilities or those laden with value traps.

“Value traps, or stocks with deteriorating fundamentals and declining prices, may pose a significant risk to dividend funds. But this strategy limits its exposure to these risky companies,” according to Morningstar research. “Sweeping half of the dividend-paying universe into its portfolio diversifies stock-specific risks, which limits the influence of distressed firms. It also weights constituents by their market cap, an approach that emphasizes larger, more-stable firms that should have the capacity to continue making dividend payments. This mitigates the impact of value traps because their weight drops as prices fall.”

VYM: Cheap and Dependable

In addition to low fees, VYM is prized for relative dependability – a trait prized by risk-averse income investors. With this type of strategy, investors shouldn’t expect significant exposure to growth sectors, but that’s working in favor of VYM holders this year. Additionally, the fund’s sector weights do fluctuate over time.

“Between 2010 and 2018, for instance, the fund’s allocation to financial stocks was anywhere from 15-20 percentage points below the Morningstar Category average. This is an artifact of the post-global-financial-crisis dividend cuts across much of the sector. While this did not hurt the fund’s relative performance significantly, there is no guarantee this sort of bet will materially harm or help its performance,” concludes Morningstar.

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