VYMI: Potential High-Yield Contrarian Play But You Can Do Better (NASDAQ:VYMI)

(This article was co-produced with Hoya Capital Real Estate.)

Going back to the earliest days of my writing on ETFs, I have been a fan of Vanguard High Dividend Yield ETF (VYM). I have covered this ETF for Seeking Alpha here and again here. It also is meaningfully weighted in my personal portfolio.

Bringing things closer to the present, I recently introduced readers to the ETF Reliable Retirement Portfolio. Here is one of the main themes featured in that portfolio.

Superior growth opportunities may come from outside the U.S. – In the graphic above, everything outside the U.S. is aggregated into one ‘Global equities’ line. However, an earlier mid-year update from Vanguard forecast Euro-area stocks as potentially outperforming their U.S. cousins by roughly one-half percent; a range of 2.9% – 4.9% as opposed to 2.4% – 4.4%. And emerging markets offered even higher potential, albeit with more volatility and risk.

As it happens, Vanguard offers a second ETF that is their international equivalent of VYM, the Vanguard International High Dividend Yield ETF (VYMI). Given the combination of what I outlined above, I thought it high time to take a look at this second ETF, to see whether I should recommend it to readers.

To be honest, as I set out to research this ETF, my initial thought was that I was going to think of it favorably. The more I look into it, however, the more I think that unless you are interested in a true contrarian gamble you would be better off allocating your funds elsewhere.

Let’s get started by taking a look at the fund. I will feature what I like about the fund, what on the surface would seem to make it a worthwhile choice. We’ll get to my reservations, as well as the contrarian gamble, towards the end of the article.

Vanguard VYMI – Digging In

With an inception date of February 25, 2016, VYMI is a much newer ETF than its sibling VYM, which has been around since 2006. It has an expense ratio of .28% and a trading spread of .04%.

As I am becoming more and more of a fan of doing, let’s start by diving in to Seeking Alpha’s excellent landing page for this ETF.

The investment seeks to track the performance of FTSE All-World ex US High Dividend Yield Index that measures the investment return of non-U.S. companies that are characterized by high dividend yield. The fund invests by sampling the index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full index in terms of key characteristics. The index focuses on companies located in developed and emerging markets, excluding the United States, that are forecasted to have above-average dividend yields. (Italics mine)

Before moving on, let me just feature the sentence I italicized in the above description. Since VYMI starts with an all-world index, both developed and emerging markets are included. I find myself attracted by this broad reach. I am a big believer in diversification, and VYMI scores well on this front.

Let’s turn next to VYMI’s sector breakdowns and Top-10 holdings.

Let’s start with a few comments on that holdings breakdown.

The first thing that jumped out at me was the truly predominant weighting of financials in VYMI. At 31.94%, these alone comprise almost one-third of the fund. As a couple of comparisons, financials only comprise 18.58% of Vanguard FTSE All-World ex-US ETF (VEU), Vanguard’s closest total-market offering when it comes to international stocks. And in VYM, financials come in at 21.34%. In contrast, technology finds only a 3.28% weighting in VYMI vs. 13.41% in VEU and 10.19% in VYM. A third significant difference is energy, at 9.27% in VYMI vs. 4.75% in VEU and 6.95% in VYM.

What am I getting at? Simply this. If you decide to go with VYMI, you are making a far heavier sector bet on financials and energy than you are with either VYM, a domestic high-yield ETF, or VEU, an international total-market ETF.

I will say, however, that VYMI’s Top 10 holdings look solid to me. As can be seen, Nestle SA (OTCPK:NSRGY) and Roche Holdings AG (OTCQX:RHHBY) are its two largest holdings. Ironically, I offered brief synopses of these two companies in a recent article featuring Vanguard FTSE Europe ETF (VGK).

As a market-cap weighted ETF, by skewing towards such large-cap and financially stable companies, VYMI manages to reduce some of the risk of its value orientation, which can sometimes sweep in companies whose stock prices are low for valid reasons, including financial distress.

VYMI Performance – Where the Rubber Meets the Road

In my analysis above, you may have noticed that I have featured VYM and VEU as two benchmarks against which I have been comparing VYMI. I did this because I asked myself the question: “If I were to decide to go a different direction than VYMI, with essentially the same investment dollars, where might I choose to allocate these?” The conclusion I came to is that I could select a domestic high-dividend ETF, if income was my primary focus, or a total-market international ETF, if diversification was perhaps my primary focus.

To help me evaluate these options, I selected VYM and VEU to be competitors against VYMI, for purposes of running a backtest. As an overall benchmark for evaluation, I selected the Vanguard 500 Index Investor index.

Below are the results. Have a look, and then I will offer some comments.

Likely, the first thing that jumps out at you is that VYMI doesn’t come out looking so good, by any measure. Of the four options in our comparison, not only does it come out with the worst absolute returns, but also the worst Sharpe and Sortino ratios.

Clearly, the Vanguard 500 Index Investor index is the runaway winner in this backtest. But, that’s perhaps not the fairest of comparisons. After all, U.S. growth stocks have pretty much blown everything else out of the water in recent history, particularly since the COVID-19 related downturn in March, 2020. And, as I have featured in several recent articles, it is entirely possible that this trend may reverse in the near-, and possibly even long-term future.

However, even when compared against VYM, more of a proxy for U.S value stocks, and VEU, a proxy for the total international market, VYMI doesn’t come out looking so good.

For a slightly different look at the above graphic, here are the comparative returns of each over each of the last 5 years.

Again, I’m struggling to find anything with which to recommend VYMI. In the good years? In general, it has lagged. And in the slower years? Well, nothing to write home about there either.

Is there anything positive that can be featured? Take a look at this one last graphic.

Yes, when it comes to a solid, and generally rising, stream of income, VYMI has been a winner over this time period.

Even here, however, I find something a little troubling. Look at the yellow line in the above graphic. That’s the income level from VEU. Not all that far behind VYMI, is it? And with a little more possibility for growth at that.

Summary and Conclusion

In the final analysis, I’m not sure I can recommend VYMI as a “go to” ETF for your portfolio. As can be seen above, it certainly appears you may have better options available to you, regardless of your investment philosophy and goals.

At the outset of the article, however, I teased the concept of possibly taking a true contrarian gamble.

Here’s one last graphic for you, courtesy of Hoya Capital Income Builder.

I want you to note two things, as highlighted with the red arrows.

First, on top of the other challenges I have featured with VYMI, there’s that .27% expense ratio. In the graphic, I list no less than 5 competing options you could at least consider. In each case, the expense ratio is far lower than VYMI.

Second, however, that contrarian gamble. Take a look at VYMI’s P/E ratio. That’s right, you could choose to consider it as being “on sale” right now. Further, remember the two heavily-weighted sectors I featured in VYMI? That’s right, Financials and Energy. I have read some analysis recently featuring the concept that these two sectors might be solid contrarian bets moving forward. If that analysis proves correct, I may end up eating my words with respect to almost everything I have written in this article.

What do you think? Please take a minute to share your thoughts in the comments section.

As always, until next time, I wish you . . .

Happy investing!