VHY replicates the FTSE Australia High Dividend Index, offering investors an above-average yield in a passive, tax-efficient vehicle.
The benchmark leans toward the highest-dividend payers, excluding property trusts. The index provider ranks all dividend-paying stocks based on their dividend yield forecast for the next year and constructs the index using stocks that make up the top 50% of the floatadjusted market capitalization. Industries are capped at 40% and individual stocks at 10%. The index is rebalanced semiannually, and in 2018, it changed its rules around buying and selling so that stocks are added or removed more gradually. This should increase the portfolio to around 55 names from 45 and reduce stock turnover, though it will likely remain higher than market-cap-weighted index funds. Vanguard’s global presence allows the Australian team to leverage the U.S. team’s extensive indextracking experience.
The FTSE Australia High Dividend Yield Index is a real-time, market-cap-weighted index comprising companies with higher-than-average forecast dividends. The biggest sector exposure is financial services, at around 39%-40% of the portfolio. The fund’s exposure to materials has historically been volatile. Following dividend cuts in the sector, exposure dropped to 4% in 2016 from 20%. However, a fall in Rio Tinto’s share price and corresponding increase in yield saw the stock return to the portfolio in June 2017, increasing the fund’s exposure to the sector to 21%. That came at the expense of industrials exposure, which fell to zero. As of 30 June 2021, materials exposure was at 23%. This highlights the risk of “dividend traps” in a rules-based strategy. The portfolio has an underweighting in the high-growth sectors of technology and healthcare, as these companies typically reinvest a large proportion of their cash flow into research and development to drive future earnings growth rather than focusing on high dividend payouts. Real estate investment trusts are excluded. More than half the portfolio is in giant caps, with the balance mostly in large and medium caps. The portfolio’s exposure to cyclical/sensitive names has increased over the years and currently stands at 93%, implying high dependence on the domestic economic cycle.
Vanguard has fared relatively well over the long term, but short- and medium-term results have been a drag. Moreover, the annual return track of the strategy is visibly inconsistent as compared with its category index. In 2012 and 2013, the strategy delivered 24.5% and 26.5%, respectively–incredible relative and absolute returns. But investors should be cautiously optimistic about a repeat of such performance as the fund delivered equally subdued relative performance in 2014, followed by a 4.22% decline in 2015 and category benchmark relative underperformance of negative 1.2% in 2016. Poorly timed buys into materials such as BHP and Rio Tinto hurt in 2016. Vanguard recouped some of these losses in 2017, though this was curtailed as exposure to Telstra took a bite out of returns. As the banking industry came under pressure because of falling property prices and the focus of the
Royal Commission in 2018, returns were again below the broader market.
Source: Morning star
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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Any advice provided by Laverne is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.