Comparing High-Dividend Income Options: Vanguard High-Dividend Yield ETF versus Invesco S&P 500 High-Dividend Low-Volatility ETF
Comparing High-Dividend Income Options: Vanguard High-Dividend Yield ETF versus Invesco S&P 500 High-Dividend Low-Volatility ETF
From a broader standpoint, you possess two investment strategies: you can opt for a broad approach or tailor your choices to cater to your specific requirements. The initial strategy mainly involves investing in widely diversified index funds, while the second strategy involves handpicking stocks or choosing an exchange-traded fund (ETF) that accomplishes this for you.
In the realm of dividend investments, this conundrum emerges when comparing Vanguard High-Dividend Yield ETF (VYM -0.37%) to Invesco's S&P 500 High-Dividend Low-Volatility ETF (SPHD -0.56%). Below, we explore how to determine which option suits your investment portfolio best.
What's the role of Vanguard High-Dividend Yield ETF?
Vanguard High-Dividend Yield ETF functions as an index-based ETF, adhering to the FTSE High-Dividend Yield Index. Its administration fee is an exceedingly modest 0.06%. The primary concern for investors is: what is the index's role?
The FTSE High-Dividend Yield Index is relatively straightforward. Initially, it selects all the dividend-paying stocks in the market. Subsequently, it discards real estate investment trusts (REITs), despite their primary aim of dividend payments.
Following this step, it arranges the remaining dividend stocks from the highest yield to the lowest, selecting half of the highest-yielding stocks to form the final portfolio. The portfolio is then weighted using market capitalization, giving the most significant impact on the ETF's performance to the largest stocks.
This method resembles a shotgun approach to dividend investing, given that Vanguard High-Dividend Yield ETF possesses over 500 stocks. This offering provides extensive diversification, but with so many stocks, it diminishes the ETF's dividend yield, which stands around 2.8%. Though it surpasses the minimal 1.2% yield provided by the S&P 500 (^GSPC -0.07%), it inevitably results in yield sacrifices in pursuit of diversification within this ETF.
What about Invesco's S&P 500 High-Dividend Low-Volatility ETF?
Invesco's S&P 500 High-Dividend Low-Volatility ETF operates on the opposite spectrum, being intensely selective. Its holdings are derived from the S&P 500 index, which includes the largest, economically significant, and influential companies in the United States. Therefore, Invesco's S&P 500 High-Dividend Low-Volatility ETF brings about a significant difference from the approach adopted by Vanguard High-Dividend Yield ETF.
The subsequent step for Invesco's S&P 500 High-Dividend Low-Volatility ETF, which tracks the S&P 500 Low-Volatility High-Dividend Index, includes ranking S&P 500 stocks from the highest yield to the lowest yield. The top 75 dividend-yielding stocks are chosen, each sector is capped with a maximum of 10 stocks. If the ceiling is reached, then additional sectors join the mix to amass the 75 stocks stalked list.
Subsequently, these 75 stocks are sorted based on standard deviation, a measure of volatility. The top 50 least volatile stocks are selected, then weighted by trailing dividend yield.
This strategy is significantly contrasting as Invesco's S&P 500 High-Dividend Low-Volatility ETF is focused on prioritizing high yield over diversification. Its selective process makes it appear more like cherry-picking individual stocks rather than the scattershot approach delivered by the Vanguard High-Dividend Yield ETF.
However, this tailored approach has its drawbacks. The added refinement results in a marginally heightened expense ratio of 0.3%, which is discouraging. Yet, it offers slightly higher yield at roughly 3.5%.
Despite the drawbacks, the ETF's historical performance has not been as robust compared to other times. Nevertheless, the rationale behind this outcome is reasonably logical. Invesco's S&P 500 High-Dividend Low-Volatility ETF targets low-volatility stocks, which tend to be more reliable dividend payers compared to growth-oriented investments. Consequently, it prioritizes higher-yielding, large stocks, which are inherently slower-growing. On the other hand, the Vanguard High-Dividend Yield ETF's diverse approach allows a wider range of growth-oriented stocks to join the fold.
Which suits your portfolio best?
The preference between these two ETFs is, unquestionably, a highly individualized choice. However, if your primary goal is to maximize the income generated, possibly for supplementing Social Security during retirement, you may favor Invesco's S&P 500 High-Dividend Low-Volatility ETF's focused methodology. Its emphasis on high yield coupled with low volatility promises more substantial dividend checks and peace of mind.
That does not suggest that Vanguard High-Dividend Yield ETF is an inferior choice, but its design prioritizes diversification over yield.
When considering your finance and investing options, you might want to examine the potential returns of both Vanguard High-Dividend Yield ETF and Invesco's S&P 500 High-Dividend Low-Volatility ETF. These funds offer different approaches to dividend investing, with Vanguard focusing on extensive diversification, while Invesco prioritizes high yield and low volatility.
Managing your money wisely involves weighing the benefits and drawbacks of each investing strategy, especially when it comes to your overall investment portfolio.