Two popular dividend ETFs are VYM, the Vanguard High Dividend Yield ETF, and HDV, the iShares Core High Dividend ETF. They differ more than you may realize. Let’s compare them.
First, note that I don’t chase dividends. But I recognize that many investors use dividends to supplement their current income, particularly in retirement. Others just irrationally prefer dividend-paying stocks. I even designed a dividend-focused portfolio for income investors. In any case, these two funds are very popular and take a somewhat different approach. Here we’ll review these dividend ETFs and explore the differences between them.
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In a hurry? Here are the highlights:
- VYM and HDV are two popular dividend ETFs from Vanguard and iShares, respectively.
- VYM launched in 2006 and HDV launched in 2011.
- Both funds capture high-dividend-yield stocks in the United States.
- HDV costs a tiny bit more at 0.08%, while VYM costs 0.06%.
- VYM is more diversified both in terms of number of holdings and sector exposure.
- Specifically, HDV only holds 75 stocks while VYM has nearly 450.
- Dividend yield is very similar between these two, with HDV’s being only slightly higher.
- VYM has outperformed HDV historically on both a general and risk-adjusted basis.
- VYM has slightly greater liquidity than HDV.
- Sector composition differs pretty significantly between these two funds.
VYM vs. HDV – Methodology, Factors, Fees, and Dividend Yield
VYM is the Vanguard High Dividend Yield ETF. It launched in 2006. VYM seeks to track the FTSE® High Dividend Yield Index. Its selection methodology is not super simple but not complex. VYM looks for U.S. stocks that have paid a dividend for at least the last 12 months, ranks them by forecasted dividend yield for the next 12 months, excludes REITs, selects the top 50%, and then weights them by market cap. VYM is certainly focused on yield, but its market cap weighting scheme keeps its 450 or so holdings well diversified across sectors.
HDV launched in 2011. It is the iShares Core High Dividend ETF. Its index is the Morningstar Dividend Yield Focus Index. As the name suggests, HDV looks for high-yielding stocks, but it tries to make sure that yield is sustainable by employing some Morningstar earnings screens in its selection process. This process makes it a bit more complex than VYM.
First, firms must have a “moat” that gives them a competitive advantage. Then ratios like debt to equity are analyzed to try to identify firms with strong profitability and cash flow. REITs are excluded here too. What sets HDV apart arguably the most from VYM is the fact that it then takes the 75 highest-yield stocks and weights them from greatest to least by dividend dollar amount, not yield per se.
VYM and HDV have an overlap by weight of about 40%. This is illustrated more clearly in the very different sector compositions of these two funds below.
VYM could be considered more diversified than HDV, both in terms of number of holdings and sector exposure.
In terms of factors, both funds have positive loadings on Value, Profitability, and Investment, but HDV’s are considerably higher for those last two thanks to its profitability screens. Both funds also tilt large with negative loadings on Size, and HDV tilts slightly larger than VYM.
While VYM and HDV both have significant assets, VYM is much more popular than HDV by about $30 billion in assets. VYM is also slightly cheaper at 0.06% compared to 0.08% for HDV. Traders may also appreciate the smaller spread of VYM at 0.01%, compared to 0.02% for HDV.
At the time of writing, HDV has a slightly higher yield by about 1/10 of a percent at 3.15%.
VYM vs. HDV – Sector Composition
Notice how VYM massively overweights Financials, while HDV massively overweights Healthcare and Energy stocks and has negligible exposure to Materials and Consumer Discretionary stocks.
VYM vs. HDV – Performance Backtest
Here’s a performance backtest of VYM and HDV going back to HDV’s inception in 2011 and looking through 2021:
During that time, VYM has beaten HDV on both a general and risk-adjusted basis, with lower volatility and a smaller max drawdown.
In conclusion, HDV’s basket of only 75 stocks and negligible weightings to several sectors make it a bit too underdiversified for my tastes. It would certainly not be suitable as a core holding for a well-diversified portfolio, particularly if you want any exposure to REITs, small caps, mid caps, or international stocks.
Choosing between these two, going with VYM also gets you greater liquidity and saves you some on fees.
Conveniently, both VYM and HDV should be available at any major broker, including M1 Finance, which is the one I’m usually suggesting around here.
Do you own either of these dividend funds in your portfolio? Let me know in the comments.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.
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