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VYM: Still A Potentially Dangerous High Yield Play

In this video, I discuss what I'm seeing with the Vanguard High Dividend Yield ETF and why I think it's still potentially risky here.

Video Transcript

Hey everybody, Dave Dierking here with ETF Focus on TheStreet.

I wanted to talk a little bit today about the Vanguard High Dividend Yield ETF (VYM). I've seen this fund get a little more mention in the financial news lately. I think it has something to do with the high yield on it. We've seen dividend stocks coming back a little bit over the last couple weeks as the broader market gets bounced around a little bit. We've seen tech stocks pulling back a little bit and I think the high yield is getting a little more attention, so I want to take a little more of a deep look on that to see what we're seeing on that right now.

I'm going to flip over to the chart real quick. This is the 5-year chart on VYM. We've seen obviously a pretty straight line up over the last few years, the bear market crash earlier this year and it started ticking up again over the last six months or so, but as you can see over the last couple of months bounced around a little bit. It's back up above its 200-day moving average, which is a good sign, but I think what we want to do here is pay attention to the fundamentals of this fund and what it's invested in.

Tech has obviously gotten a lot of attention over the last several years and people pivoting over to dividend stocks and dividend funds like this one need to be aware of what they're getting into. VYM has a very low allocation to tech compared to what the broader market is right now. It's only get about 9% in tech and this fund is heavy into financials, consumer staples and a lot of the traditional telecoms, so you're getting a lot of value exposure here and some cyclical exposure, a couple of areas that have been out of favor with the market for a little while now.

So that's a bit of a contrarian play right now and I think you want to be aware of that. If you feel that interest rates are heading up in the short-term, it should be good for the financial stocks. Maybe not so much for the cyclicals. The dividend yield on this is 3.5% right now, so about twice that of the S&P 500. So that is attractive, but I think you just want to keep an eye on the fact that these are high yield stocks and default & downgrade risk for a lot of these companies is still high.

We've got coronavirus infections back on the uptick, so if we see businesses begin to close again, I think you're probably going to see this fund and this group probably underperforming again.

Take a look at the piece of the chart here on the bottom. This is the ratio of VYM to the S&P 500. In general, we've seen all throughout 2019, the trend started down. It was underperforming and all throughout 2020, high yield dividend stocks have underperformed significantly. Again, that's pretty much COVID-related. We've seen a lot of downgrades & defaults and that steered investors away from this.

I guess over the near-term, I think you want to pay attention interest rates here. If you think interest rates are going higher, I think that's probably a sign that the market is believing in this recovery and that's probably bullish for stocks. I think you'll probably see this group do relatively well because it's a little more on the riskier end of the dividend stock universe.

But if you believe that COVID-19 is potentially going to result in a double dip recession here or if it's going to cause a pullback in stocks, as we've seen very much today already, it's looking a little risky. If you think that's going to continue, I'd say you probably want to stay away from this fund. Again, it's heavy in some of the more traditionally defensive sectors, which is a good thing, but I think it's reaching a bit for yield here. So you're getting some of the riskier names, especially some of the names in energy, which have gotten hammered and I think you might want to be a little cautious with that.

So I just wanted to mention a little bit what I'm seeing here. I think VYM is in a bit of a tricky spot. You want to be careful if you're entering the market here, but just want to make you aware that. I'm going to keep an eye on this fund over the next few weeks up until the election and all throughout 2020 and I suggest you do as well. This is Dave Dierking, ETF Focus on TheStreet. We'll talk to you again soon.