Investors looking to reduce the risk of their investment portfolios through diversification or increase the portfolio's return potential often choose to invest in high-dividend-yielding securities. One investment fund that focuses on this genre of securities is the Vanguard High Dividend Yield ETF (NYSEARCA: VYM). This exchange-traded fund (ETF) is the largest that seeks to replicate the performance of the FTSE High Dividend Yield Index.

FTSE High Dividend Yield Index

The FTSE High Dividend Yield Index consists of equities that are characterized as having higher-than-average dividend yields. This index is based on the FTSE All-World Index and specifically excludes real estate investment trusts (REITs) and stocks that are forecast to not pay a dividend for the next 12 months. The remaining stocks available are selected and weighted to ensure that the index is actually investable. The fund's 30-day Securities and Exchange Commission (SEC) yield is 3.1%,

Vanguard High Dividend Yield ETF

The Vanguard High Dividend Yield ETF provides a convenient way for investors to gain access to the securities and performance of the above index. This large value fund has $15.3 billion in assets under management (AUM) as of August 2016. The expense ratio is only 0.09%, which is 92% lower than the average expense ratio of funds investing in similar securities. This fund uses a passively managed full-replication approach to reach its goal.

Portfolio Structure

The fund is invested in 427 different stocks as of June 30, 2016. The top 10 holdings comprise slightly more than 32% of the entire portfolio, and foreign holding account for less than 0.5% of the fund. About 42% of the fund is invested in the consumer goods, financials and technology sectors. As for the lowest weighted sectors, consumer services and basic materials comprise less than 10% of the total portfolio. Overall, the fund's weighting compared to the index weighting in any given sector only deviates by plus or minus 0.1%. With that said, the fund invests in a handful of stocks that are not included in the index, and the median market cap of companies of the fund and index are $134.9 billion and $122.8 billion. This is usually the case when the stocks were at one time included in the index but may have some liquidity issues, so the fund maintains the position and slowly eliminates it over time. The top holdings are, Microsoft (NASDAQ: MSFT), Exxon Mobil (NYSE: XOM), and Johnson & Johnson (NYSE: JNJ).


Fund Performance

The fund began on Nov. 10, 2006. Since then, through July 31, 2016, the fund had an annualized return of 7.21%, about 10 basis points below the index. Given the expense ratio of the fund, this is clear indication that the tracking error of the fund is almost nonexistent. Through July, the average five-year annual return was 14.32%, and the average annual three-year return was 10.85%. Year-to-date through Aug. 6, 2016, the fund has returned 11.25%.

Risk Considerations

Through to July 2016, the fund has a standard deviation of 10.5. While this risk metric may be too high for some, other risk measures show that as an equity fund, VYM is less risky. The beta of the fund versus its index is of course 1.0. When calculated against more well-known market indices, such as the Standard and Poor's 500 index and the Dow Jones U.S. Total Stock Market index, the fund has three-year beta values of 0.91 and 0.88 respectively. Over a five-year period versus the Standard and Poor's 500 index the fund has an upside capture ratio of 93% and a downside capture ratio of only 77%.