Vanguard’s Dividend Detour

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Vanguard. The name itself sounds…responsible. Like a stern headmaster, or a particularly sensible brand of oatmeal. They’ve built this reputation, you see, of being the sensible ones on Wall Street, offering low-cost funds and generally not making a fuss. They’re currently second in line for the ETF crown, trailing BlackRock, which feels a bit like a polite competition between two exceptionally organized librarians. I keep expecting them to start shushing each other.

They have a lot of ETFs, over a hundred, most of them boasting expense ratios so low they practically apologize for existing. Which leads people to assume everything they touch turns to gold. It doesn’t. Not always. My aunt Mildred, bless her, once bought a timeshare based on a similar assumption. It didn’t end well.

Most of their funds are perfectly adequate. The broad-market ones, the sector funds, even the geographically focused ones – they’re solid. It’s the ones that try to be clever that give me pause. The ones that promise you extra, a little something special. It reminds me of those free keychains you get at conferences. You take one, then another, and suddenly your key ring is a chaotic mess of promotional plastic.

I’ve been looking at the Vanguard High Dividend Yield ETF (VYM +0.17%). It’s enormous, holding over $72 billion. And the expense ratio? A mere 0.04%. They’ve even lowered it recently, as if to say, “We’re so sorry for charging you anything at all.” It yields 2.3%, which is more than double the S&P 500. On paper, it checks all the boxes. It just…doesn’t feel right.

A Strategy as Bland as Unsalted Crackers

The fund tracks the FTSE High Dividend Yield Index. Which, in theory, sounds fine. Companies that pay above-average dividends? What’s not to like? But the devil, as always, is in the details. And in this case, the details are… remarkably loose.

“High Yield” is a Surprisingly Flexible Term

They start with every stock imaginable, then rank them by their projected dividend yield over the next year. Then they take the top 50%. Fifty percent! That means if the average yield is 1.5%, anything over 1.51% qualifies as “high yield.” It’s like saying anyone who can tie their shoes is an Olympic athlete. The bar is…low.

A high-yield strategy needs to be more discerning. It needs to be selective. Narrow the field, raise the standards. Otherwise, you’re just buying everything that happens to be paying a dividend, and that feels…lazy. It’s like my brother’s approach to grocery shopping – anything that isn’t green and moldy is fair game.

A Crowd of 500

This ETF holds over 500 stocks. Five hundred! Diversification is good, of course. But there’s a point where it becomes…diluted. It’s like inviting everyone you’ve ever met to a party. You end up with a room full of people you don’t know, and no one can find the snacks.

There shouldn’t be 500 companies that qualify as “high yield.” It suggests they haven’t really bothered to find the truly high-yield stocks. They’ve just cast a wide net and hoped for the best. It’s a strategy I employ when searching for misplaced keys, and it rarely works.

The REIT Omission

They’ve excluded Real Estate Investment Trusts, or REITs. Which, admittedly, can be a bit volatile. But they also tend to offer high yields – 4% or higher. Eliminating them feels like throwing away perfectly good ingredients. It’s like making a cake and deciding you don’t need the sugar.

Cap-Weighted, Naturally

This is the most egregious part, in my opinion. They weight the portfolio by market capitalization. Meaning the biggest companies get the biggest weighting. Which completely undermines the whole point of a high-dividend strategy. It’s like ordering a pizza and getting mostly crust.

I’m not a fan of pure yield-weighting, either. That can be risky. But at least it would be consistent. At least it would be true to its mission. Cap-weighting just feels…arbitrary. It feels like they’re letting the market do all the work.

In short, I’m not particularly impressed with this ETF. There are better dividend ETFs out there, ones that are more targeted, more thoughtful. Vanguard does a lot of things right, but this fund isn’t one of them. It’s not a terrible fund, mind you. It’s just…bland. Like unsalted crackers. And in the world of investing, I prefer a little more flavor.

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2026-02-10 16:24