Vanguard FTSE AllWld HiDivYld ETF $Dis GBP (LSE:VHYL) - ETF price


ETF Report

Vanguard FTSE All-World High Dividend Yield UCITS ETF USD Distributing (GBP) VHYL

AnalystReport

PortfolioConstruction

The FTSE All-World High Dividend Yield Net Total Return Index is a subset of the FTSE All-World Index and consists of its highest-yielding stocks, excluding real estate and investment trusts. It is made up of nearly 1,500 constituents, which are expected to pay dividends during the next 12 months and weighted on a market-cap basis. The index’s composition is reviewed and rebalanced semiannually in March and September. The biggest country exposure is the United States (around 40%-50%), followed by the United Kingdom (9%-11%) and Japan (5%-8%). Emerging economies currently make up 9%-12% of the portfolio. Financial services are the index’s biggest sector, with 25%-30% weighting, followed by energy (10%-12%), consumer defensive and healthcare (both 9%-11%).

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Fees

With an ongoing charge of 0.29%, the fund is the cheapest global dividend ETF available. Index funds should provide the returns of their benchmark, less fees. However, since inception, this fund has delivered more than that as its tracking difference (fund return less index return) has been positive, meaning that the fund has outperformed its index. This is because of the quality of portfolio optimisation, which is unique to each individual provider. It can also be attributed to the fact that the fund is domiciled in Ireland and enjoys a lower dividend withholding tax rate in comparison with the index. The fund’s annualised tracking error during the past three years has been low, at 0.10% in annualised terms. In the case of broad indexes, where optimisation is required, we consider low tracking error of high importance as it removes the uncertainty of volatile benchmark-relative performance and ensures investors can benefit fully from in-built sources of outperformance such as differences in withholding tax. Investors should also consider trading costs, including bid-ask spreads and brokerage fees, when buying and selling the ETF.

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FundConstruction

The fund employs a close-to-full replication approach to track the performance of the FTSE All-World Net Return Index. The portfolio managers seek to add value by minimising costs and cash drag. For instance, to limit market impact, they try to anticipate index changes and corporate actions and trade a few days before and after the change takes place. To limit cash drag caused by dividend payments, the fund managers use futures for an amount equivalent to up to 1% of the fund's value. Client portfolios are managed where the clients are located, but trades are executed locally. Vanguard has become one of the largest money managers by giving fund owners a fair deal, straight talk, and strong performance overall. The source of Vanguard's competitive advantage and the foundation of its culture is its mutual ownership structure. Fund shareholders own Vanguard through their funds, which compels the firm to operate at cost rather than for profit and put investors' interests first.

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Suitability

We retained this fund's Morningstar Analyst Rating at Bronze to reaffirm our confidence in its ability to outperform the Morningstar Category average over the long term. We think this low-cost exchange-traded fund offers a sensible approach to gain exposure to global dividend stocks in a single investment.

The strategy targets the highest-yielding segment of the FTSE All-World Index, an index that represents 90%-95% of the global stock market (including emerging countries), and weighs the stocks according to their market capitalisation. This strategy results in low turnover and it ensures that the portfolio stays broad and well-diversified. Unlike other dividend-focused indexes, the FTSE All-World High-Dividend Yield Index does not evaluate the ability of its constituents to sustain their dividend payments.

With an ongoing charge of 0.29%, this fund is the cheapest global dividend ETF on offer in Europe. This is testament to Vanguard’s commitment to indexing and its mutual structure; Vanguard is run for investors, with profits often passed on as lower fees.

The fund has shown above-average risk-adjusted performance during the trailing three-year period when compared with peers in the category, which includes actively managed funds. Additionally, this optimised Vanguard fund has outperformed its benchmark. We attribute this to the quality of its portfolio optimisation as well as its domiciliation in Ireland, which allows it to reclaim dividend withholding tax from a number of countries. Also, the fund’s considerable size has allowed the portfolio managers to purchase nearly all securities in the index, bringing the portfolio close to full replication. We view this positively, as it enables the fund to track its index accurately.

While it doesn't screen its holdings for profitability or their dividend payment sustainability, the fund's broad market-cap-weighted portfolio effectively diversifies risk. It also offers an attractive dividend yield and is low cost.

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Fundamental View

In a theoretical frictionless market, dividend payout policy shouldn't affect stock returns (for further reading, see the Modigliani-Miller Theorem). A dividend payment should reduce the firm's stock price by an offsetting amount. But in practice, dividends often matter because they can impose greater discipline on managers in their capital-allocation decisions, leaving less money for low-return investments. And managers may use these payments to signal their confidence in their firms' prospects. Dividends can also help address some behavioural issues, including many investors' reluctance to realise capital gains to meet income needs, and may give them the fortitude to weather market volatility.

Investors can benefit from owning dividend-paying stocks, but chasing yield can be dangerous. The highest-yielding stocks could be under financial distress and more likely to cut their dividends than their lower-yielding counterparts. Many of these stocks pay out a large share of their earnings as dividends, leaving a small buffer to cushion these payments if their business deteriorates. This fund mitigates some of this risk through its broad diversification. It holds neatly 1,500 names and market-cap weights them, so the larger dividend payers make up a greater portion of its holdings. These firms should be better able to maintain their dividend payments during a market downtown than smaller, higher-yielding stocks.

Market-cap weighting tilts the portfolio toward the largest dividend stocks, which may not be the highest-yielding. But this approach limits the fund's exposure to the riskiest stocks and reflects the market's view about the relative value of its holdings. Even though it doesn't tilt toward the highest-yielding stocks, the benchmark's dividend yield as of the end of August 2019 was 3.7%--higher than the 2.4% category average. Market-cap weighting also helps keep turnover low. The fund does not remove stocks before they cut their dividends unless such cuts are reflected in the third-party dividend forecasts that it uses to select them.

Like most dividend-oriented strategies, this fund has a pronounced value tilt. Mature, slow-growing companies tend to trade at lower valuations and pay out a larger share of their earnings as dividends than their faster-growing counterparts, which invest aggressively to expand. Such characteristics can lead to higher dividend yields.

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Alternatives

A handful of other European-domiciled ETFs offer exposure to global dividend stocks, including (but not limited to) iShares World Quality Dividend, SPDR S&P Global Div Aristocrats, UBS ETF DJ Global Select Div, Lyxor SG Global Quality Income, and Xtrackers Stoxx Global Select Div. Given the different methodologies of the indexes they track, these funds’ risk/reward profiles and sector and country compositions will differ.

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AJ Bell Management Limited (company number 03948391), AJ Bell Securities Limited (company number 02723420) and AJ Bell Asset Management Limited (company number 09742568) are authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales at 4 Exchange Quay, Salford Quays, Manchester M5 3EE. See website for full details. AJ Bell procures the provision of the Morningstar Licensed Tools on an “as is” basis and does not guarantee the performance of or accept liability for the Licensed Tools. To the maximum extent permitted by law, AJ Bell excludes liability for the Licensed Tools, including liability for any failure, interruption, delay or defect in the performance of any Licensed Tool, unless it arises as a direct result of the negligence of AJ Bell.
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