Daniel Grizelj
Investment Thesis
Vanguard International High Dividend Yield ETF (NASDAQ:VYMI) deserves a buy rating among international dividend funds based on multiple attractive qualities. First, VYMI offers investors vast international diversification with over 1,000 holdings and a relatively low expense ratio. Second, VYMI provides a solid dividend yield while having greater dividend sustainability than other higher yielding funds. Third, while VYMI has demonstrated lower long-term performance than the Vanguard International Dividend Appreciation ETF (VIGI), VYMI currently indicates a more attractive valuation.
The Overall Case for International and Emerging Market Investment
We should start by discussing the potential importance of international diversification to a portfolio. Vanguard has been predicting the outperformance of international equities for the last several years. In its 2023 market outlook, Vanguard projects 7.2%-9.2% annualized returns for non-U.S. developed markets and 7%-9% for emerging markets over the next 10 years. This is compared to their projection for U.S. markets at just 4.7%-6.7% for the next decade. Vanguard attributes part of this projection due to the recent underperformance of emerging markets driving valuations to be more attractive. Therefore, the investment firm recommends at least 20% of an overall portfolio in international stocks and bonds. This objective not only achieves greater diversification, but according to their forecast, may also lead to greater performance. If you agree with Vanguard’s projection and recommendation, let us take a closer look at VYMI and several top peer funds.
Fund Overview and Compared ETFs
VYMI is a passively managed exchange-traded fund that was initiated in 2016. The fund tracks the FTSE All-World ex U.S. High Dividend Yield Index, has 1,324 holdings, and $7.6B in AUM. VYMI includes predominantly large cap (77.7%) and medium cap (13.2%) holdings. The fund is heavier on developed markets (78.42%) than emerging markets (21.58%). VYMI’s weight by sector is largest in financials (36.62%), followed by industrials (10.96%) and energy (10.43%). By nation, VYMI is heaviest in Japan (15.63%), followed by the UK (11.69%) and Australia (7.81%).
For comparison purposes, other funds examined are the Franklin International Low Volatility High Dividend Index ETF (LVHI), iShares International Select Dividend ETF (IDV), and VIGI. While there are many more international dividend funds, these three were selected for having greater than $500M in AUM. LVHI has a similar geographic mix but is heavier on consumer discretionary and communication services than VYMI. IDV, compared to VYMI, is lighter on Japanese holdings (8.91%) and is heaviest geographically in the UK (14.67%). Peer fund, VIGI, compared to VYMI, has a lower weight on emerging markets at just 9.60%. VIGI seeks to capture holdings that have a record of increasing their dividends year over year.
Performance, Expense Ratio, and Dividend Yield
VYMI has seen a 5-year average annual return of 6.43%. By comparison, LVHI has a 5-year average annual return of 8.41%, IDV has a 5-year average annual return of 6.12%, and VIGI has seen an average 5-year return of 8.21%. While all funds have underperformed the S&P 500 Index over the past five years, this has led to relatively attractive valuations for the international funds which I will discuss later.
5-Year Total Price Return: VYMI and Peer Examined International Dividend Funds (Seeking Alpha)
On par with Vanguard’s quest for low fees, VYMI and VIGI both have low expense ratios at 0.22% and 0.15%, respectively. These are both lower than LVHI and IDV. VYMI has a higher dividend yield than sister fund VIGI, but lower than LVHI and IDV. VYMI’s dividend growth CAGR has been average at 6.25% over the past five years.
Expense Ratio, AUM, and Dividend Yield Comparison
|
VYMI |
LVHI |
IDV |
VIGI |
|
|
Expense Ratio |
0.22% |
0.40% |
0.51% |
0.15% |
|
AUM |
$7.61B |
$842.72M |
$4.16B |
$6.80B |
|
Dividend Yield TTM |
4.86% |
7.65% |
6.58% |
2.01% |
|
Dividend Growth 5 YR CAGR |
6.25% |
11.17% |
1.10% |
10.32% |
Source: Seeking Alpha, 28 Mar 24
VYMI Holdings and Its Competitive Advantages
VYMI far surpasses peers in terms of diversification with over 1,300 holdings. It is therefore no surprise that its top 10 holdings weight is the lightest at just 14.36%. Although each fund seeks international holdings with significant dividend yield or dividend growth, their holdings mix varies greatly. The few similarities with VYMI’s top 10 holdings are bolded below.
Top 10 Holdings for VYMI and Peer International Dividend ETFs
|
VYMI – 1,324 holdings |
LVHI – 119 holdings |
IDV – 101 holdings |
VIGI – 312 holdings |
|
7203.T – 2.39% |
STLA – 3.25% |
BTI – 4.31% |
NOVO – 5.96% |
|
NOVN.SW – 1.74% |
MSBHF – 3.01% |
BHP – 3.35% |
SAP – 4.53% |
|
SHEL.L – 1.70% |
MBGAF – 2.95% |
TTE – 3.34% |
NOVN – 3.72% |
|
ROG.SW – 1.48% |
9434.T – 2.82% |
MBG – 3.12% |
NESN – 3.21% |
|
HSBA.L – 1.26% |
VOW3.DE – 2.73% |
ENEL – 2.72% |
ROG – 3.17% |
|
SIE.DE – 1.23% |
HOLN.SW – 2.70% |
VOD – 2.71% |
SU – 2.90% |
|
BHP.AX – 1.20% |
BMW.DE – 2.63% |
RIO – 2.66% |
RELIANCE – 2.88% |
|
TTE.PA – 1.16% |
ZURN.SW – 2.62% |
INGA – 2.40% |
TD – 2.60% |
|
RY – 1.14% |
PPL – 2.62% |
ENI – 2.15% |
6758 – 2.58% |
|
CBA.AX – 1.06% |
6178.T – 2.58% |
FMG – 2.12% |
SAN – 2.52% |
Source: Multiple, compiled by author on 28 Mar 24
To further examine the prospects for VYMI compared to peer funds, we can take a deeper dive into each ETF’s specific holdings. Compared to LVHI, VYMI has top holdings that demonstrate greater growth potential. IDV’s top holdings are cause for concern due to their high dividend payout ratios. Finally, VIGI has a high valuation which may dampen near-term capital appreciation. These differences are discussed in further detail below.
VYMI vs. LVHI: The Car Wars
While Franklin Templeton’s LVHI fund is the top dividend contender with a 7.65% yield, VYMI demonstrates noteworthy advantages in its top holdings. LVHI’s top holding at 3.25% weight is Stellantis (STLA), a Netherlands-based automotive company. VYMI includes STLA, but at a much lower weight at 0.47%. Interestingly, VYMI’s top holding at 2.39% is also an automotive company, Toyota Motor Corporation. While each of these top holdings are a relatively low percentage of overall weight, they have notable growth differences. The company is seeing mediocre revenue growth at 5.54% YoY. On a related note, Stellantis recently announced the third round of employee layoffs in the past year. By comparison, Toyota boasts a 22.87% YoY revenue growth along with 55.03% EBITDA growth. Another top holding for LVHI, Mercedes Benz (OTCPK:MBGAF), also has seen unimpressive revenue growth at 2.13% YoY. Toyota’s investment into its future is also impressive with $35B towards electric vehicles and the goal to have a 30-strong EV lineup by 2030. Therefore, I believe VYMI has stronger top holdings than LVHI looking forward.
VYMI vs. IDV: The Decline of Smoking and High Payout Ratios
VYMI also has noteworthy holding advantages over IDV. Aside from IDV having the highest expense ratio of examined funds, several of IDV’s holdings have dividend sustainability concerns. While IDV’s top holding, British American Tobacco (BTI), has an attractive 9.63% dividend yield, its payout ratio stands at a high 63%. The percentage of smokers in the UK has been on the decline generally since 2011. Therefore, I am hesitant to believe in the sustained dividend growth and yield for IDV. As you may recall, IDV has the lowest 5-year dividend growth CAGR of all four funds examined.
VYMI vs. VIGI: High Valuation May Drag VIGI’s Performance
While VIGI has seen the highest 5-year performance of all examined international dividend funds, it also has the greatest risk of being overvalued. This is predominantly driven by the price-to-earnings of several of VIGI’s top holdings. Novo Nordisk, for example, has seen a 68% YTD price return that has driven a P/E ratio almost double its sector. SAP (SAP), a German software company, also has high valuation with a P/E ratio significantly higher than both its sector and its own 5-year average. By comparison, Toyota and Novartis, top holdings for VYMI, have attractive valuations that are lower than their sector medians. Therefore, while VIGI may offer investors a solid option for long-term capital appreciation, it has a high valuation currently with the lowest dividend yield of funds compared.
Current Valuation
Compared to the peer funds examined, VYMI has done well over the past year. In fact, VYMI has even beat Vanguard peer fund, VIGI, by almost half a percent. All funds examined are near the top of their 52-week highs. VYMI has a current price of $68.82. However, this is lower than historic peak prices of $72.13 in January 2018 and $70.97 in June 2021.
One-Year Performance: VYMI and Peer International Dividend Funds (Seeking Alpha)
Based on our previous discussion, it should come as no surprise that VIGI demonstrates the highest P/E and P/B ratios. Its top holdings have high valuations contributing to less desirable metrics for the fund overall. VYMI is roughly on par with LVHI and IDV in terms of its valuation with a 10.2 P/E ratio and 1.3 P/B ratio. Given VIGI’s valuation and the dangers discussed with LVHI and IDV’s top holdings, one can reasonably expect VYMI to continue performing well compared to these top peers over the next year.
Valuation Metrics for VYMI and Peer Competitors
|
VYMI |
LVHI |
IDV |
VIGI |
|
|
P/E ratio |
10.20 |
9.63 |
7.75 |
23.3 |
|
P/B ratio |
1.30 |
1.38 |
0.91 |
3.2 |
Source: Compiled by Author from Multiple Sources, 28 Mar 24
Risks to Investors
Yes, there are several well-known risks for investing internationally including geopolitical risk, liquidity risk, currency risk, and so on. However, in my mind, the greatest risk is that Vanguard is just plain wrong about the future of international performance compared to U.S. domestic equities. Vanguard’s own found, Jack Bogle, said that “for a lot of reasons, you don’t need to own international stock.” His rationale was that when you buy an S&P 500 Index fund, nearly half of those company earnings come from international sources. My counterargument, and the reason why I am investing in international, is the current price. The S&P 500 Index currently has a P/E ratio of 28.51. As discussed, the P/E ratios for the international funds examined are considerably more attractive.
Concluding Summary
I am inclined to agree with Vanguard’s rationale for including international holdings in a portfolio. VYMI is an attractive choice to achieve this objective with broad diversification and relatively low cost. While VYMI has an average dividend yield compared to peer funds examined, it has a strong mix of holdings with multiple key advantages over other funds’ top holdings.
