The expectation of interest rate cuts may have fixed income investors wondering if it’s necessary to take on more risk with high yield bonds. However, even the risk averse can appreciate a built-in risk mitigation strategy in a fund like the Vanguard High Dividend Yield Index Fund ETF Shares (VYM ).
Per its baseline fund description, VYM tracks the performance of the FTSE High Dividend Yield Index. This index consists of common stocks of companies that generally pay higher-than-average dividends. It cracked "Morningstar’s favorites list":https://www.morningstar.com/funds/why-vanguard-high-dividend-yield-etf-is-one-our-favorites for its balanced approach to high yield.
As Morningstar pointed out, fixed income investors who have tunnel vision for yield may overlook the risk of these high dividend-paying companies. During economic downturns, in particular, these companies can have risky fundamentals, but VYM steers clear of these stocks. Furthermore, about 67% of its portfolio is in large-cap stocks, which can survive better during economic hardships.
“Sweeping half of the dividend-paying universe into its portfolio diversifies stock-specific risks and limits the influence of distressed firms,” Morningstar said. “Market-cap weighting also emphasizes larger, more-stable firms that should have the capacity to continue making dividend payments. This mitigates the impact of value traps because their weight drops as their prices fall.”
Furthermore, the fund has a track record of strong performance, which could soften any fears investors may have about forthcoming bond market volatility during an election year.
“This ETF has consistently beat its category index since inception,” Morningstar added. “Outperformance during periods of market stress has been a hallmark. For example, this ETF beat its category index by 3.62 percentage points during the covid-19 selloff between Feb. 19, 2020, and March 23, 2020. Its advantage grew again during rocky markets in 2022, with the fund besting its bogy by over 7 percentage points over that period.”
An International Alternative
For an even more diversified approach, fixed income investors can also look for opportunities overseas. Different companies in other parts of the globe can offer high dividend opportunities as well, which is where the Vanguard International High Dividend Yield ETF (VYMI ) shines.
Given the vast opportunities in international fixed income, VYMI offers an all-in-one option. The fund allows investors to navigate the international markets without studying an excess of financial data to find the best opportunities. VYMI can help to eliminate the guesswork involved with nuanced international investing.
For more news, information, and analysis, visit the Fixed Income Channel.
