JEPI - Passive Income Snowball: How Does VYM Stack Up Against 6 Competing ETFs?

2023-11-12 22:06:15 ET

Summary

• Vanguard High Dividend Yield Index Fund ETF is a well-diversified, low-cost dividend growth fund for passive income.
• VYM has quite a few competitors in the area of higher yielding ETFs.
• We compare it against six of its biggest competitors and offer our take.

The Vanguard High Dividend Yield Index Fund ETF ( VYM ) is known for being a well-diversified, low-cost, dividend growth fund that greatly streamlines the process of building a passive income snowball for investors who want a completely hands-off experience that saves their time and mental energy for other pursuits.

However, VYM is not the only option out there, as there are many other popular dividend growth ETFs that offer similar products to VYM. In this article, we will compare VYM to the following other high-yield ETFs and offer our take on how it stacks up against its competition:

• JPMorgan Nasdaq Equity Premium Income ETF ( JEPQ )
• JPMorgan Equity Premium Income ETF ( JEPI )
• Amplify CWP Enhanced Dividend Income ETF ( DIVO )
• Schwab U.S. Dividend Equity ETF ( SCHD )
• SPDR® Portfolio S&P 500 High Dividend ETF ( SPYD )
• Invesco S&P 500® High Dividend Low Volatility ETF ( SPHD )

Total Return Track Record

Over the past year and a half, VYM has posted a middling total return performance relative to peers. As illustrated in the chart below, VYM generated a total return of -3.76%, which was surpassed by JEPI, JEPQ, and DIVO, all of which were boosted by their significant exposure to mega-cap technology stocks that have generated tremendous outperformance over that period. That being said, VYM still significantly outperformed other high-yielding dividend growth ETFs like SCHD, SPHD, and SPYD, showing that for more value-focused funds, VYM has weathered recent headwinds quite well:

Over the longer term, VYM has performed pretty well against the funds that have been around since then, outperforming SPYD and SPHD, while trailing SCHD:

Dividend Yield & Growth Track Record

VYM's trailing twelve-month dividend yield and 5-year dividend per share CAGR is solid, with a TTM dividend yield of 3.27% and a respectable 5-year dividend CAGR of 5.60%, indicating that its income stream is growing faster than the long-term rate of inflation. In contrast, JEPI and JEPIQ have very inconsistent payouts (due to the lumpy nature of their options premiums, which account for the vast majority of the cash flow that they distribute to shareholders). That being said, both ETFs offer high current TTM dividend yields, with JEPIQ at 10.94% and JEPI at 9.26%, which are substantially higher than the other ETFs, making them potentially attractive for investors seeking current income.

SCHD stands out with the highest 5-year dividend CAGR at 13.69%, paired with a TTM dividend yield of 3.77%, which suggests that investors in SCHD have enjoyed significant dividend growth alongside a yield that is above the average for U.S. equities, making it an exceptional dividend growth ETF.

On the lower end of the dividend growth spectrum, SPHD and DIVO have 5-year dividend CAGRs of 2.49% and 2.61%, respectively. While these growth rates are modest, they are generally in line with long-term inflation averages and come with very attractive TTM dividend yields of 4.80% for SPHD and 4.91% for DIVO, making them attractive sources of current income. SPYD is quite similar in its growth and yield profile to SPHD and DIVO, with its 5-year dividend CAGR of 2.72% and a TTM dividend yield of 5.24%.

Expense Ratio

Expense ratios are a critical factor to keep in mind when evaluating an ETF because they directly impact an investor's net returns, especially over the long term. Even a seemingly small difference in expense ratios can have a significant effect on an investment's growth potential over time due to the compounding effect that it has year after year. Over the long term, a higher expense ratio can consume a considerable portion of a fund's gains. Therefore, a lower expense ratio is often seen as a competitive advantage for an ETF, especially when compared to another ETF that has a similar investing strategy.

Both JEPQ and JEPI have moderate expense ratios of 0.35%. While this is one of the higher expense ratios in this list of ETFs, it is important to keep in mind that both JEPQ and JEPI are actively managed and generate significant cash flow through options trading, thereby warranting some of the additional fees that investors pay for access to the services that these ETFs supply.

In comparison, the Amplify CWP Enhanced Dividend Income ETF, identified by its ticker DIVO, has an even higher expense ratio of 0.55%. This is not entirely surprising given that DIVO is also actively managed and trades some options as well, so it generally has more operating expenses than passively managed ETFs.

On the more cost-effective side, passively managed ETFs like SCHD feature very low expense ratios. SCHD has an impressively low expense ratio of 0.06%, making it an attractive choice for investors who prioritize cost savings for long-term compounding. SPYD's expense ratio is only slightly higher at 0.07%, while SPHD has an expense ratio of 0.30%, making it a bit pricey for an ETF with fairly similar results to the cheaper passively managed funds.

In comparison, VYM's expense ratio of 0.06% matches SCHD as the lowest among the ETFs in our list and one of the cheapest ETFs in the entire market, making it a compelling choice for investors who want to retain as high of a percentage of their earnings as possible.

Portfolio Composition

VYM's sector allocation is designed to reflect a diversified approach, with a skew towards sectors traditionally known for dividend yield and stability. Financials represent the largest sector within the fund, comprising 19.91% of the portfolio. Consumer Defensive, a sector known for resilience during economic downturns, makes up 14.18%. Health Care, another stable sector with a history of reliable dividends, accounts for 13.32%. Industrials and Energy sectors also have significant allocations at 11.84% and 11.74%, respectively, reflecting the fund's intent to capitalize on these sectors' potential for growth and dividend payouts. Technology, often seen as a growth sector, represents 9.69%, indicating a balanced approach between growth and income for the fund as a whole.

When it comes to the fund's top holdings, each stock is a large and well-established business with a history of dividend payouts. Exxon Mobil Corp. ( XOM ) leads the list with 3.61% of the fund's total holdings, followed by JPMorgan Chase & Co ( JPM ) at 3.21%, and Johnson & Johnson ( JNJ ) at 2.88%. Procter & Gamble Co. ( PG ) makes up 2.64% of the portfolio, Broadcom Inc. ( AVGO ) at 2.57%, and The Home Depot Inc. ( HD ) at 2.35%. Chevron Corp ( CVX ) follows closely with 2.29%, then AbbVie Inc. ( ABBV ) at 2.02%, Merck & Co., Inc. ( MRK ) at 2.01%, and finally, PepsiCo, Inc. ( PEP ) at 1.79%. Collectively, these top ten holdings comprise 25.37% of the fund's portfolio indicating a concentration in companies that are leaders in their industries and grow their dividends very consistently year after year. Moreover, its 456 individual holdings make VYM very well-diversified.

JEPQ differs from VYM in that it is very heavily weighted towards Technology, with a substantial 50.38% of its assets allocated in this sector. The difference is further highlighted in JEPQ's top holdings, which include tech giants like Microsoft Corp. ( MSFT ), Apple Inc. ( AAPL ), Alphabet Inc. Class C ( GOOG ), Amazon.com, Inc. ( AMZN ), and NVIDIA Corp. ( NVDA ). Moreover, JEPQ's holdings are more concentrated, with the top 10 accounting for 48.01% of the total holdings, compared to VYM's 25.57%, implying a more focused bet on a smaller number of companies.

JEPI, while less focused on technology stocks than JEPQ is, still shows a notable lean towards Technology and Health Care, with allocations of 17.72% and 14.02%, respectively. VYM, on the other hand, is more heavily weighted towards Financials and has substantial holdings in sectors like Consumer Defensive and Health Care, indicative of its focus on dividend yield and defensiveness. Additionally, unlike JEPQ, JEPI's top 10 holdings, account for just 15.93% of its total holdings, which is not only far less than JEPQ but also a smaller concentration compared to VYM's top 10.

SCHD differs from VYM in that its largest sector allocation is in Industrials at 18.00%, followed closely by Health Care at 16.34% and Financials at 15.32%. Moreover, SCHD's top 10 holdings make up a whopping 40.93% of its total holdings, making it much less diversified than VYM and therefore a more aggressive bet on a group of core holdings to drive its outsized dividend growth and total returns instead of spreading its bets among many companies like VYM does.

SPYD's sector allocation emphasizes Financials and Real Estate, with these sectors comprising 21.92% and 20.99% of the fund, respectively. Utilities also comprise a considerable portion of the ETF at 15.72%, pointing to SPYD's preference for stable, high-yield stocks. In comparison, VYM has little exposure to real estate and utilities.

Moreover, SPYD's top 10 holdings represent a slightly smaller portion of the total fund at 15.72% compared to VYM's top 10 holdings, indicating that it is focused on spreading out its bets and not becoming overly reliant on a few companies to drive total returns and dividend growth.

DIVO is quite heavily weighted towards Technology and Financials, with these sectors comprising 18.43% and 18.12% of its portfolio, respectively. In contrast, VYM's allocation is also significant to Financials but spreads more evenly across sectors like Consumer Defensive and Health Care, pointing towards a preference for stability and consistent dividend payers. DIVO holds a whopping 62.19% of its portfolio in its top 10 holdings, reflecting its active management and high-conviction approach to investing.

SPHD has a significant allocation in Utilities at 17.88%, followed by Real Estate at 16.32% and Health Care at 12.56%. This reflects a strategy somewhat similar to SPYD's, where the fund focuses on stable, defensive, and high-yielding names more than pursuing companies that have high growth potential.

Its top 10 holdings comprise 28.35% of its total portfolio, making it only slightly more invested in its top holdings than VYM is, meaning that its risk profile is fairly low.

Investor Takeaway

VYM stands out as a solid choice for investors seeking a diversified and low-cost means to build a passive income stream. Our analysis in this article reveals that while VYM holds its own in terms of total return performance and dividend yield and growth, ETFs like JEPQ and JEPI offer higher current yields and are actively managed, potentially justifying their higher expense ratios. In contrast, SCHD's impressive dividend growth, similar expense ratio, and comparable yield make it a formidable competitor, especially for those focused on dividend growth. SPHD, SPYD, and DIVO, meanwhile, with their higher yields and lower growth rates, cater to those seeking immediate income along with at least some growth, in contrast to the sky-high yields, but inconsistent payouts from JEPI and JEPQ.

VYM is also one of the best diversified of these ETFs, resulting in a lower risk profile over the long term for this fund relative to others. For investors who are seeking to maximize current income or dividend growth, VYM is not the best choice. However, for investors who want a balance of the two along with a very low expense ratio and very significant diversification in order to mitigate company-specific risk, VYM is an excellent choice.

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