(This article was co-produced with Hoya Capital Real Estate)
As I moved from being a new investor when getting my first job to now being retired, my investment goals moved from accumulation and growth to preservation and keeping my income growing faster than inflation wants to erode its value. I am one of the privileged ones who built the proverbial three-legged retirement stool: Social Security, a pension (non-COLA), and a seven-figure nest egg. After starting Social Security just after my Full Retirement Age, or FRA, our income became bigger than our current expenses. A great place to be but with only a fraction of our income with any inflation protection, and the possibility of a drastic jump in expenses if our health “goes south”, the strategy of maintaining a positive cash flow as long as possible drives our asset selection not dedicated to preservation when the next 20+% correction comes and stays longer than the COVID-19 market reaction did.
This leads me to look for funds like the Vanguard International High Dividend Yield ETF (NASDAQ:VYMI) with its 4.5% yield. Part of those searches always includes comparing such a focused-strategy ETF to one that invests in the same markets without that extra mandate. In this case, that included two other Vanguard ETFs: the Vanguard FTSE All-World ex-US ETF (NYSEARCA:VEU) and the Vanguard Total International Stock ETF (VXUS). Since the index used by VYMI is a sub-index of the one used by VEU, I chose that ETF for this article's comparison analysis.
Seeking Alpha describes this ETF as:
Vanguard International High Dividend Yield ETF is an exchange traded fund launched and managed by The Vanguard Group, Inc. It invests in public equity markets of global ex-US region. It invests in stocks of companies operating across diversified sectors. The fund invests in growth and value stocks of companies across diversified market capitalization. It invests in dividend paying stocks of companies. It seeks to track the performance of the FTSE All-World ex US High Dividend Yield Index VYMI started in 2016.
Source: seekingalpha.com VYMI
VYMI has $3.5b in AUM and delivers a 4.5% yield to investors. Vanguard charges 22bps in fees.
A good place to start any analysis of an ETF that invests against an index is with that index. Unfortunately, I only found the full All-World Index description as FTSE doesn't post some of their specialty indices:
The FTSE All-World High Dividend Yield Index is designed to represent the performance of companies after implementing a forecast dividend yield ranking process. The index comprises stocks that are characterized by higher than average dividend yield based on the FTSE All-World Index, which is part of the FTSE Global Equity Index Series.
Source: ftserussell.com Index
The Index Methodology document provides the ground rules for constructing this Index. To the following rules, add US stocks are not considered.
I will go into more detail about sectors in the comparison but note the extreme dependence on the Financial sector: 32.34%! While REITs are excluded, other Real Estate-type stocks are not and they comprise the least weighted sector.
As one might expect, the Large-Cap components dominate the Top 10 list, which comprises a reasonable 16% of the assets. Currently, VYMI holds 1240 stocks.
While dividends are paid quarterly, the fact many foreign stocks pay semi-annually influences each payout. Since a high dividend payout is their main investment strategy, achieving only a "A-" on the Seeking Alpha Yield grading scale could be considered a disappointment. The overall score of only a "B" must reflect the "C" scores for recent payout growth.
The dividend grade is the lowest of the five grades Seeking Alpha gives to ETFs.
Seeking Alpha describes this ETF as:
Vanguard FTSE All-World ex-US ETF is an exchange traded fund launched and managed by The Vanguard Group, Inc. It invests in public equity markets of global ex-US region. The fund invests in stocks of companies operating across diversified sectors. The fund invests in growth and value stocks of companies across diversified market capitalization. It seeks to track the performance of the FTSE All-World ex US Index. VEU started in 2007.
Source: seekingalpha.com VEU
VEU has $32.1b in assets, or about 9X VYMI's size. The current yield is about 100 bps less at 3.5%. Fees are only 8bps, meaning Vanguard is charging an extra 14bps to implement the dividend rules followed by VYMI. That explains partly why VEU has better performance. The comparison might reveal more.
As I did with VYMI, let's start with the index used by VEU, the FTSE All-World ex US Index. Since this Index is what the High Dividend is built from, I will give less details. FTSE describes this Index as:
The FTSE All-World ex US Index is one of a number of indexes designed to help investors benchmark their international investments. The index comprises Large and Mid cap stocks providing coverage of Developed and Emerging Markets excluding the US. The index is derived from the FTSE Global Equity Index Series (GEIS), which covers 98% of the world’s investable market capitalization.
Source: research.ftserussell.com Index
Again, I could not find the methodology document for this index but they would follow the same rules as the other index with at least these two restrictions removed:
When we compare the ETFs, any other difference should surface.
Notice that while still the largest allocation, Financials is much closer to the next sectors down in weight, with Technology moving up to #2.
Four companies appear in both Top 10 lists (Nestle (OTCPK:NSRGY), Toyota (TM), Roche (OTCQX:RHHBY), Novartis (NVS)), with the first three lists being at the top of the VYMI listing. With over 3600 stocks, the Top 10 only comprise 9.43% of the assets, about 6% less than VYMI's concentration at the top.
It is easier to see the YOY dividend growth back when VEU only paid yearly. As we will see, recent growth has been above inflation, which is a goal set by many investors.
The complete grades provided by Seeking Alpha for VEU are:
As one might expect, especially being International ETFs, Putin's invasion of Ukraine has both ETFs now underwater for 2022, though, as mentioned above, VEU is still ahead since VYMI's launch in 2016.
The above data shows VEU has consistently provided a higher CAGR than VYMI. VEU managed to do that with better risk metrics too: Sharpe ratio (.59 vs .49); Sortino ratio (.82 vs .69).
The following data from the Vanguard website dates to the end of January, thus there could be differences from what Seeking Alpha shows, which was newer.
VYMI holds larger stocks on average than VEU and both Price ratios favor that ETF in terms of Value. VEU has better data for both ROE and Earnings growth. The dividend rules cause VYMI to have a much higher turnover ratio, which probably accounts for Vanguard charging more in fees.
Along with the large differences in the Financials and Technology sectors mentioned above, three others stand out: Consumer Cyclicals and Industrials in favor of VEU, and Energy in favor of VYMI. Based on which sectors provide better yields, all five of those weighting differences are logical.
Three of the top five countries are in both lists, with Japan and the United Kingdom swapping the top two slots. China, #3 in VEU, is #7 with half the weight in VYMI. The Swiss have a good percent in VEU also.
Based on those three comparisons, the sector weight differences, which is often the case between ETFs with different strategy goals, probably account for most of the CAGR difference.
One option is to own VEU and sell shares to make up the income difference. There were quarters when VEU generated more income than VYMI. The following table used these assumptions.
The ending values take the 3/9/22 price * shares. For VEU, the banked income was added. While VEU is still ahead, the actual results could differ based on the price the investor got when selling 1 share 9 times. Having to sell shares narrowed the CAGR gap. Portfolio Visualizer shows when not reinvesting from $1002 to my estimated difference of only $363. It should be noted that by not reinvesting, the investor was $446 worse off than if they did.
Every decision has effects one might not be aware of as they can be hidden, like the fact not reinvesting dividends because the funds will have negative consequences if the investment increases in price. Another is suffering from "analysis paralysis", the tendency to not make any decision trying to make the "best" decision. After six years, it is almost a "wash" as to which of these two ETFs one should have bought back in 2016 when VYMI launched.
If you open the window wider, besides having a dividend-focused international ETF on one's investment horizon, there are many other strategies to pick from. One is whether to hedge your international exposure, which I explored recently in this article: IHDG Vs. IQDG. Here are some other international ETFs to consider:
Source: Hoya Capital Income builder
There are sites like seekingalpha.com, and etfrc.com, plus others that allow investors to compare holdings across funds to see how each fund's strategy changes the allocation from a pure strategy fund. Some allow you to compare more than two funds and against criteria beyond the holdings allocation. Any due diligence, even on a single fund, should include such analysis to truly understand what you own or are considering to own.
I ‘m proud to have asked to be one of the original Seeking Alpha Contributors to the 11/21 launch of the Hoya Capital Income Builder Market Place.
This is how HCIB sees its place in the investment universe:
Whether your focus is high yield or dividend growth, we’ve got you covered with high-quality, actionable investment research and an all-encompassing suite of tools and models to help build portfolios that fit your unique investment objectives. Subscribers receive complete access to our investment research - including reports that are never published elsewhere - across our areas of expertise including Equity REITs, Mortgage REITs, Homebuilders, ETFs, Closed-End-Funds, and Preferreds.
This article was written by
I have both a BS and MBA in Finance. I have been individual investor since the early 1980s and have a seven-figure portfolio. I was a data analyst for a pension manager for thirty years until I retired July of 2019. My initial articles related to my experience in prepping for and being in retirement. Now I will comment on our holdings in our various accounts. Most holdings are in CEFs, ETFs, some BDCs and a few REITs. I write Put options for income generation. Contributing author for Hoya Capital Income Builder.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.