A Venerable Vanguard Dividend ETF

Home to $18.9 billion in assets under management as of the end of August, the Vanguard High Yield Dividend ETF (NYSE:VYM) is one of the largest U.S. dividend exchange-traded funds. While size does matter to some extent with ETFs, there is more to VYM's story.

VYM tracks the FTSE High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields, according to Vanguard. As is the case with many Vanguard ETFs, VYM is fee-friendly. With an annual expense ratio of just 0.08 percent, or $8 on a $10,000 investment, VYM is cheaper than 92 percent of competing funds.

While it is positioned as a high-yield ETF, VYM's trailing 12-month dividend yield of 2.9 percent, is not alarmingly high, but it is better than what investors find on the S&P 500 or 10-year U.S. Treasuries. VYM does not hold real estate investment trusts.

A Helpful Approach

Dividend stocks typically arrive at what appear to be impressive yields because of falling share prices. Additionally, high dividend yields can financially strain some companies, leading to dividend cuts or suspensions, so focusing on large-caps can be advisable with high-yield dividend payers. That is what VYM does.

Although the fund targets high-yielding companies, its market-cap-weighting approach helps it to effectively diversify the risk of solely focusing on yield, said Morningstar in a recent note. In fact, its portfolio represents nearly 38 percent of the holdings in the Russell 3000 Index. And while the fund has meaningful exposure to a few of its largest holdings, they are not among its riskiest positions.

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The median market value of VYM's 406 holdings is $129.6 billion, indicating this is primarily a large- and mega-cap ETF. VYM's top 10 holdings, which combine for almost a third of the ETF's weight, include mega-cap fare such as Microsoft Corporation (NASDAQ:MSFT) and Johnson & Johnson (NYSE:JNJ).

Reducing Risk

VYM takes steps to reduce some of the risks associated with high-yield dividend stocks.

This fund mitigates some of this risk through its broad diversification, said Morningstar. It holds more than 400 names and market-cap-weights its holdings, so the larger and more stable dividend payers make up a greater portion of its holdings. These firms should be better able to maintain their dividend payments during a market downtown than smaller, higher-yielding stocks.

Consumer staples and technology stocks combine for 28.4 percent of VYM's weight and with financials and healthcare combining for 27 percent.

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