An index fund is an investment product designed to track the performance of a particular financial market index, such as the S&P 500 or the Nasdaq Composite. Compared to individual stocks, passively managed index funds offer certain advantages, including instant diversification across a group of companies. Index funds also allow investors to gain exposure to the stock market without the burden of keeping tabs on individual stocks.
With that in mind, the S&P 500 and the Nasdaq Composite have dropped into bear market territory in 2022, making the Vanguard High Dividend Yield ETF (VYM -0.84%) and the Vanguard Dividend Appreciation ETF (VIG -0.82%) attractive investment ideas right now, especially for risk-averse investors.
As the names imply, both ETFs are comprised of companies that consistently generate enough cash to pay relatively high dividends, and companies like that tend to hold up well during volatile market conditions. In fact, both ETFs have outperformed the broader S&P 500 over the past year.
Here is what investors should know about these Vanguard index funds.
1. Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF is intended to track the FTSE High Dividend Yield Index, a fund comprised of U.S. companies that pay higher-than-average dividends. Like its benchmark, the ETF includes 443 stocks from across 10 of the 11 market sectors, and the top four sectors account for more than 50% of its holdings: financials (20.0%), healthcare (14.0%), energy (10.2%), and industrials (10.2%).
The three largest positions in the portfolio are blue chip companies Johnson & Johnson, ExxonMobil, and JPMorgan Chase, while stalwarts Procter & Gamble, Home Depot, and Coca-Cola also have a place among the top 10 holdings. The ETF currently boasts a dividend yield of 3.02%, and it bears an expense ratio of just 0.06%, meaning investors would pay just $6 per year on every $10,000 they hold in the ETF.
Thanks to its star-studded portfolio, the Vanguard High Dividend Yield ETF has helped investors avoid some of the volatility that has plagued the broad market in the past year. In fact, the ETF is currently 13% off its high, while the S&P 500 is down 22%. Additionally, the ETF has generated a total return of 165% over the last decade, which works out to roughly 10.2% per year. At that pace, a $10,000 portfolio would grow into over $26,000 over the next decade.
2. Vanguard Dividend Appreciation ETF
The Vanguard Dividend Appreciation ETF is designed to mirror the S&P U.S. Dividend Growers Index, a fund composed of domestic companies that have increased their dividends every year for at least a decade. Like its benchmark, the Vanguard ETF holds 289 stocks from across 10 of the 11 market sectors, and the top four sectors are weighted to account for more than 65% of its performance: information technology (23.4%), healthcare (15.5%), financials (14.7%), and consumer staples (13.6%).
The three largest positions in the portfolio are UnitedHealth Group, Microsoft, and Johnson & Johnson, though payments giants Mastercard and Visa are also part of the top 10. The Vanguard Dividend Appreciation ETF has a dividend yield of 1.89%, falling short of the High Dividend Yield ETF, though it bears the same low expense ratio of 0.06%.
In spite of its lower yield, the Vanguard Dividend Appreciation ETF has actually outperformed the Vanguard High Dividend Yield ETF over the long run. It generated a total return of 186% over the last decade, which is equivalent to an 11.1% annual return. At that pace, a $10,000 portfolio would grow into nearly $29,000 over the next decade.
That outperformance is due in part to its much greater exposure to technology stocks. Of course, while that has been a blessing over the long term, it has also been a curse more recently. The index fund has fallen 18% from its high, though it has still outperformed the S&P 500 over the past year.
As a final thought, while both Vanguard ETFs discussed in this article have been less volatile than the broad market recently, the Vanguard Dividend Appreciation ETF is the more concentrated of the two. That makes it a good option for investors willing to take on a little more risk, especially those that are bullish on the tech sector.
