Investing in individual stocks is a great way to build wealth, but it's not for everyone. It takes a lot of time to do your due diligence, and it can be difficult to stick with your original thesis during market downturns.
It's also tempting to prematurely pick your flowers before they bloom. So if you don't want to do too much homework and want instant exposure to a well-diversified portfolio, it might be smart to invest in an exchange-traded fund (ETF).
One of the most popular ETFs is the Vanguard High Dividend Yield ETF (VYM -0.09%), which tracks the FTSE High Dividend Yield Index. It's invested in 580 stocks, and its top holdings include Broadcom, JPMorgan Chase, ExxonMobil, Walmart, and Johnson & Johnson. It could also be one of the best ETFs to own for five simple reasons.
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1. It provides both income and growth
The Vanguard High Dividend Yield ETF pays a 30-day SEC yield of 2.6%. That's lower than the 10-Year Treasury's 4.2% yield, but it's more than double the S&P 500's average yield of 1.2%.
Unlike other ETFs that pay higher dividends but trade sideways, this Vanguard fund tracks companies that are steadily growing their profits as well as their dividends. Over the past 10 years, its share price rose 115%, and it delivered a total return of 195%, including its reinvested dividends.
2. It charges low fees
The ETF charges an expense ratio of 0.06%, which is much lower than the average expense ratio of 0.14% for passively managed index ETFs. Many "high yield" dividend ETFs charge even higher expense ratios of 0.35% to 0.49%. That lower fee means you'll keep more of your gains.
3. It's a defensive play
The S&P 500 has risen 10% this year and currently hovers near its all-time high. But most of that rally was driven by the tech sector, which accounts for over a third of its market cap.
By comparison, the Vanguard High Dividend Yield ETF allocates only 12% of its portfolio to tech stocks, and it spreads its investments across other sectors. That diversification should make it a more defensive play than the Vanguard S&P 500 ETF, another popular fund, which passively tracks the S&P 500 for an even lower expense ratio of 0.03%.
Moreover, the S&P 500 looks historically expensive right now at 30 times earnings. With tariffs, geopolitical conflicts, and other challenges still hanging over the market, it wouldn't be surprising for the S&P 500 to pull back by the end of the year. If that happens, the Vanguard High Dividend Yield ETF might be a better defensive play.
4. It doesn't rely on REITs
Many income-focused ETFs invest in real estate investment trusts (REITs), which buy properties, rent them out, and distribute most of their rental income as dividends. REITs usually pay high yields, but they're also heavily exposed to interest rates swings.
When interest rates rise, it becomes more expensive to purchase new properties, while the resulting macro headwinds could erode their occupancy rates, profits, and dividends. By intentionally excluding REITs, the Vanguard High Dividend Yield ETF becomes a more reliable long-term investment.
5. Lower interest rates will boost its appeal
Last but not least, lower interest rates should drive more investors back to the ETF. It doesn't look attractive compared to the 10-Year Treasury right now, but that could quickly change once the Federal Reserve starts cutting its benchmark rates again.
We should remember that the 10-Year Treasury's yield was still below 2% in the first half of 2022, and we could return to those levels (or lower) once inflation is reined in. When that happens, funds like the Vanguard High Dividend Yield ETF -- which provide a balanced blend of growth, income, and stability for a low fee -- should attract a lot more attention again.
