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 0.57%) and the Vanguard High Dividend Yield ETF (VYM +0.14%). 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.
Image source: Getty Images.
HDV vs. VYM: Two very different high-yield strategies
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.
NYSEMKT: HDV
Key Data Points
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.
NYSEMKT: VYM
Key Data Points
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.
HDV vs. VYM: Side-by-side comparison
| Metric | HDV | VYM |
|---|---|---|
| Expense ratio | 0.08% | 0.04% |
| Assets under management | $13.4 billion | $76.9 billion |
| Dividend yield | 2.9% | 2.3% |
| 10-year annualized total return | 9.4% | 11.7% |
| Year-to-date total return | 12.5% | 9.3% |
| Number of holdings | 74 | 612 |
| Top sectors | Consumer Staples (25%) Energy (21%) Healthcare (16%) | Financials (20%) Industrials (14%) Healthcare (13%) |
Data sources: BlackRock, Vanguard.
The Vanguard High Dividend Yield ETF may have better returns over the past decade, but that's largely a function of its broad inclusion strategy. The iShares Core High Dividend ETF is more of a traditional dividend-stock portfolio, as shown by its top sector holdings. Including more modest dividend payers also gives it a bit more of a growth tilt, something that's benefited the Vanguard ETF lately.
For those looking for more of a pure high-dividend yield play, the iShares Core High Dividend ETF is the winner. It does a better job of targeting, offers a higher yield, and the quality screen is a nice cross-check against riskier stocks. With this type of strategy, more concentration is better.
