The Vanguard High Dividend Yield ETF (NYSEMKT:VYM) is a passively managed exchange-traded fund that invests in several hundred stocks with above-average dividends. Although the stock market looks generally expensive right now, the fund could still be a smart choice for your portfolio. Here's what investors should know about this ETF and why you might want to consider it.

About the Vanguard High Dividend Yield ETF

As the name implies, the Vanguard High Dividend Yield ETF invests in stocks that pay high dividend yields. Specifically, the ETF tracks an index known as the FTSE High Dividend Yield Index, which contains approximately 400 stocks with above-average dividend yields, specifically excluding real estate investment trusts (REITs).

Jar of coins labeled "dividends."

Image Source: Getty Images.

The index tracked by the fund is weighted, meaning that larger components make up more of the fund's assets. So, although the fund owns more than 400 stocks (404 to be exact), the 10 largest holdings make up 30.9% of its assets, as of July 31, 2017. These 10 holdings, ranked by the percentage of the fund's assets they represent, are:

Company

% of VYM Assets

Microsoft (NASDAQ:MSFT)

5.8%

Johnson & Johnson (NYSE:JNJ)

3.8%

ExxonMobil (NYSE:XOM)

3.6%

JPMorgan Chase (NYSE:JPM)

3.4%

Wells Fargo (NYSE:WFC)

2.6%

AT&T (NYSE:T)

2.5%

Procter & Gamble (NYSE:PG)

2.5%

General Electric (NYSE:GE)

2.4%

Chevron (NYSE:CVX)

2.2%

Verizon (NYSE:VZ)

2.1%

Data source: Vanguard. Percentages may not add up perfectly due to rounding.

Because all of the stocks in the index pay above-average dividend yields, so does the ETF. As of this writing, the Vanguard High Dividend Yield ETF pays a 2.9% yield, as compared with 1.84% for the Vanguard 500 Index Fund ETF, which simply tracks the S&P 500 index.

How much does it cost?

The Vanguard High Dividend Yield ETF is a passive fund, meaning that it simply tracks an index as opposed to being actively managed, where professional managers handpick investments. As a result, the ETF has a rock-bottom 0.08% expense ratio. This means that for every $10,000 you have invested, your annual expenses are just $8.

Who should invest in it?

In a nutshell, the Vanguard High Dividend Yield ETF is a good investment for people who:

  • Don't want the risk or time commitment involved with researching and investing in individual stocks.
  • Want some downside protection, as dividend-paying stocks tend to fare better during corrections and recessions than their non-dividend counterparts.
  • Don't want to pay the higher fees that come with actively managed mutual funds and ETFs.
  • Want to draw income from their investment portfolio, either now or in the future.

Is it a buy right now?

To be clear, the market does look rather expensive as a whole right now, but that doesn't mean you should try to time the market and stop investing. Sure, we could get a 10% correction in the near future like many experts are predicting, or we could still have a lot of room to the upside.

Since there's no way to know for sure what will happen next, averaging into a rock-solid, low-cost fund like the Vanguard High Dividend Yield is always a good idea. Buying a little at a time helps reduce the risk of market fluctuations, and the fund mitigates any company-specific risk.

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Matthew Frankel owns shares of AT&T.; The Motley Fool owns shares of and recommends Johnson & Johnson and Verizon Communications. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.