VYMI: International Blue Chip Dividend ETF; Still Reasonable Long-Term Value

It's been less than a year since we first featured the Vanguard International High Dividend Yield Yield ETF here. This is essentially a sister fund to the domestic-focused VYM, the Vanguard High Dividend yield Yield ETF. Many readers will be familiar with it. The selection process is more complex than simply collecting the highest yielding stocks, despite the name. While stocks are ranked based on their 12-month forecast dividend yield, they are selected so that only half of the universe is based upon market value. Market-cap is also used to determine the weighting of each ticker.

This skews the ETF towards larger dividend-paying blue chips stocks. Names like TD Bank and Roche, HSBC, Unilever, Royal Dutch Shell, Nestle, Novartis and Roche are some of the most prominent holdings. It is a crude way of capturing value because it focuses on dividend yield. However, I recognize that there are better ways. A vehicle such as EFV, or the MSCI EAFE Valu ETF is what comes to my mind. It will in large part swim in the same pool with VYMI regardless of its constituents. VYMI is still a solid asset if you are a fan of dividend-paying stocks. There are many dividend ETFs that are much less well-constructed.

There are a few other things to keep in mind that you may not have considered last time. First, this list contains around 1,200 stocks, with the top 10 representing less than 15%. VYMI is well-diversified. Second, 20% of assets currently are invested in emerging market stocks. While there is no need to geographical diversify for the sake, current valuations in emerging markets seem very attractive.

Units Recover COVID Lostses

VYMI was clearly suffering from COVID since it appeared on the site in May . They traded at $48, which was about 25% less than the price they were trading in May of that year. This was a bigger fall than VYM, but marginally better than the MSCI ACWI Ex USA Value Index. VYMI's exposure in bank stocks may have contributed to VYMI's underperformance. VYMI paid out $1.96 per unit for 2020, compared to $2.68 last year. Dividends also suffered a significant hit. It's not surprising that this happened. Dividend cuts like those made by BP and Shell speak for themselves. However, a stronger US Dollar may have also played a part. Foreign currency fluctuations are something investors should be aware of, particularly if they happen in shorter time frames.

VYMI has now recovered all of its COVID losses. My screen shows that the current price is $66.63 per unit. This represents a roughly 9% return on investment since January 2020. It continues to outperform VYM. VYMI has outperformed VYM in both the 12- and 6-month views. However, this may be due to VYMI's severe dropback in Q1 2020. VYM's performance is around 500 bps if we go back to the baseline pre-COVID at the beginning of 2020. VYM also outperformed VYMI in the year to-date.

As readers know, I don't measure success in this way. However, this trend has been evident for a while. For over a decade, US stocks have outperformed foreign counterparts. VYMI isn't around as long, but VYMI's 9.3% per year pre-tax total returns since inception (2016) still places it behind VYM. Value as a strategy has performed badly for quite some time. VYMI has outperformed the MSCI ACWI Ex USA Index, which includes growth names such as LVMH or Alibaba.

Still a reasonable value

It's not surprising, given the above, that so few investors feel the need to take a look at this one. It's not that VYM's members don't do business overseas. Look at prominent US blue chips such as Johnson & Johnson and Procter & Gamble, which are both important holdings of VYM. People who argue for looking abroad due to cheap valuations still have to wait for that to happen. That argument was made less than a year ago, and it still holds true. VYM has a better portfolio of stocks that are based on profitability. More on that later.

Vanguard's PE ratio is just under 15 in terms of valuation. This is based upon the past year which includes some very distress earnings numbers due COVID. The forward ratio is around 12. This compares well to VYM which trades at a forward PE ratio around 16. But there's more to it than that. This is because of the higher earnings quality of VYM. VYMI is more exposed than VYM to bank stocks. However, VYM's share of the market for consumer staples and technology is smaller than VYM. The difference in return on equity between VYMI and VYM is approximately 400-500 bps. VYMI also surrenders 22 basis point net to VYM when it comes to the annual fee. The current annual charge is 0.28%.

VYMI looks good despite all the above. It's not difficult to get decent returns with a PE of 12, is it? With no growth, the implied internal rate is currently around 8% per year. The TTM distribution current yield is currently at around 3%. However, this may not be a particularly useful metric. The 'true forward dividend yield' of ETFs with current holdings is likely to be higher. However, we would probably be able to grow our EPS by about 5% annually. This is a low bar and VYMI should be considered a long-term investment.