High dividend yields provide income investors with the cash they need, and Vanguard High Dividend Yield ETF (NYSEMKT:VYM) has given those investors the income and total returns they've wanted to see. Given the exchange-traded fund's success, it was only natural for The Vanguard Group to use the same idea with international investing, and thus, the Vanguard International High Dividend Yield ETF (NYSEMKT: VYMI) was born.
Investors who are putting their money into dividend stocks have to be curious whether the tried-and-true U.S. ETF will get supplanted by its upstart rival, or whether international stocks won't be able to keep up with the U.S. rally. Given that the philosophy is a valid one for investors, both ETFs have similar strengths and weaknesses that will play out slightly differently in their respective market environments.
Focusing on the biggest companies
Both Vanguard's U.S.-focused high dividend ETF and its international counterpart include some of the largest companies in the world among their top holdings. For the U.S. version, giants like Microsoft (NASDAQ: MSFT), ExxonMobil (NYSE: XOM), and Johnson & Johnson (NYSE: JNJ) pay ample dividend income that the ETF collects and distributes to investors on a regular basis. Meanwhile, the international ETF has companies that U.S. investors know well and love, including chocolate and food giant Nestle (NASDAQOTH: NSRGY), pharma specialist Novartis (NYSE: NVS), and banking behemoth HSBC Holdings (NYSE: HSBC).
Interestingly, though, the sector allocations the two ETFs have differ substantially. In the international realm, financial services stocks play the biggest role, making up more than a third of the Vanguard international dividend ETF's total portfolio. By contrast, defensive stocks like consumer staples, healthcare, and utilities make up a relatively small portion of the portfolio, and technology is almost nonexistent within the ranks of the stocks the ETF owns.
By contrast, the domestic dividend ETF's portfolio is heavily concentrated in technology stocks and consumer company names. Financials do a play a key role, but at just 15% of the portfolio, they are much better balanced as part of a diversified set of holdings in the domestic ETF than in its international counterpart.
Getting the income you need
So far, both dividend ETFs have been good about making lucrative distributions to shareholders. Currently, the domestic ETF has a yield of 3.1%, which is well above the average for the U.S. stock market.
The international ETF has only been in existence for about a year, so its distributions don't yet give a full picture of what investors can expect. International companies tend to make one or two dividend payments each year of varying size, and that has a big impact on eventual yield. Based on three quarters' worth of dividend distributions from when the fund was in operation throughout the period, the annualized distribution yield of 2.9% is certainly in line with what the U.S. version of the ETF has paid.
The cheaper alternative
Vanguard is good about keeping costs low, but it's at the mercy of economies of scale in pricing its products. Vanguard High Dividend Yield has almost $18 billion in assets at the ETF level, and that allows it to offer an expense ratio of just 0.08%. That figure has come down dramatically over the ETF's history, as rising asset levels made operating the fund less expensive.
By contrast, the Vanguard International High Dividend Yield ETF has a relatively high expense ratio of 0.32%. Part of that stems from the fact that the fund has only about $225 million in assets under management, following the typical ramp-up period for a new exchange-traded fund. Yet the other side is that international investing is usually more expensive than investing in U.S. stocks, and those higher costs get passed through to investors in the form of higher expense ratios. Even the biggest Vanguard international funds have higher expense ratios than their most popular U.S. counterparts.
Which Vanguard dividend ETF is right for you?
In the end, either Vanguard dividend ETF is likely to serve income investors well by providing the combination of growth and income that they need. If you think the U.S. market has further to run in its leadership role, then the domestic ETF will look more promising. Yet if you think international markets can catch up, then putting some of your money into the new international ETF could prove to be the better bet.