Let’s be real. The vast majority of investors aren’t hoping for another crash or bear market. But as Benjamin Franklin supposedly said, failing to prepare is preparing to fail. In investment terms, the takeaway from that famous quote is that it’s better to be proactive than to be caught flat-footed when unfavorable market conditions arrive.
Fortunately, not all preparation strategies require investors to sacrifice “goodies” such as upside. Market participants looking to purchase some “crash insurance” today may want to examine the Vanguard High Dividend Yield ETF (VYM +0.32%). The third-largest dividend exchange-traded fund (ETF), this juggernaut offers some buffer in bad times because dividend stocks tend to be less volatile than their non-payout counterparts.
This Vanguard ETF can offer some protection during market downturns. Image source: Getty Images.
This dividend ETF lives up to that billing. Over the past decade, its annualized volatility was 170 basis points below that of the Vanguard S&P 500 ETF (VOO +0.46%). The trade-off was market-lagging performance, but the dividend fund is a durable income generator with legitimate protection credentials.
Details matter with the VYM ETF
As highlighted by its $96.1 billion in assets under management, there’s a broad audience for this Vanguard ETF. Its income-generating and favorable volatility traits make it appealing to retirees, while market participants of all stripes can use the ETF to augment growth-heavy portfolios.
In terms of crash preparedness, this Vanguard fund delivers, as stocks with high dividend yields have a track record of holding up well during tumultuous times. That history reveals another important point. There are stocks with high yields and those with HIGH yields. Some in the latter category become yield traps and dividend offenders when companies need to conserve cash.
Fortunately, this Vanguard ETF is deceiving in a good way. Yes, its yield of 2.3% is more than double that of the S&P 500‘s, but that’s not so high as to warrant concern. Actually, many of the 605 stocks residing in this ETF can be accurately described as blue chip dividend stocks.
Vanguard High Dividend Yield ETF
Today’s Change
(0.32%) $0.51
Current Price
$161.06
Key Data Points
AUM
$96B
Dividend Yield
2.25%
Expense Ratio
0.04%
Top Holdings
AVGO
8.52%
JPM
3.15%
XOM
2.53%
That’s not hype. Some of this fund’s top holdings, such as Caterpillar, ExxonMobil, and Johnson & Johnson, have dividend-increase streaks measured in decades, meaning these companies have boosted payouts annually and without fail through bear markets and recessions. When markets go haywire, and that’s bound to happen again at some point, there’s nothing quite like the cushion of dependable dividend growth.
More things to like about VYM
There are other reasons this is one of the best Vanguard ETFs, regardless of market environment. First, long-term investors can harness this ETF’s income stream to amass larger stakes during market downturns. That’s called compounding, plus it positions investors for rebounds. After all, U.S. stocks don’t stay mired in bear markets forever.
Second, this ETF lives up to Vanguard’s low-cost heritage. It charges just 0.04% annually, or $4 on a $10,000 investment, meaning there’s minimal fee erosion during rough market settings.