Key insights
- The article compares iShares Core High Dividend ETF (HDV) and Vanguard High Dividend Yield ETF (VYM), highlighting their different approaches to high-yield investing. HDV focuses on financially healthy companies with competitive advantages, while VYM includes a broader range of high-yield stocks. The author suggests HDV is a better pure high-yield play due to its quality screen, potentially offering slightly better downside protection in a volatile market.
When comparing two exchange-traded funds (ETFs) with very similar names, it's a good default position to assume that they're not the same. Dividend ETFs are a great example of this. There are over 100 dividend ETFs in the marketplace. Most create their portfolios and generate income in very different ways.
Take, for example, the iShares Core High Dividend ETF (HDV +0.00%) and the Vanguard High Dividend Yield ETF (VYM 0.83%). Both have "high dividend" in their names and would, on the surface, seem to be similar. But they're not. There's only modest overlap. Sector allocations are quite different. Their targeting strategies consider unique factors.
If you're weighing whether to include either of these dividend ETFs in your portfolio, you need to understand exactly what you're buying first.
The iShares Core High Dividend ETF invests in roughly 75 dividend-paying U.S. stocks that have been screened for financial health. It uses a pair of Morningstar measures -- the Economic Moat rating and the Distance to Default rating -- to help ensure the companies the index is targeting have competitive advantages and strong balance sheets.
In my opinion, this fund is the better pure high-yield play. The quality screen is always a good thing to implement with a high-yield strategy, since it helps avoid some of the riskier dividend stocks. The decision to weight components by the total dollar amount of dividends paid rather than yield is also a smart choice. It doesn't necessarily eliminate the possibility that a dividend cut candidate is included, but it helps avoid overweighting those stocks whose yields might be artificially high.
The Vanguard High Dividend Yield ETF invests in a large basket of 600-plus companies forecast to have above-average dividend yields. From a starting universe of large-cap stocks, the fund will include the top half of yields for the final portfolio.
This is, in my opinion, a rather bland high-yield strategy. Including more than 600 stocks in a dividend ETF dilutes the intent of a high-yield strategy. The comparatively modest 2.3% yield evidences this. A fund like this should be more selective in what it includes.
HDV has a yield advantage over VYM and would be the preferred choice from an income-generation standpoint. HDV's quality screens have helped mitigate downside risk in the past, though they've also contributed to the fund underperforming VYM over the past decade.