VYM Is a Popular Dividend ETF for Passive Income. But Is It the Best?

Dividend yield is an important part of the story here, but the real benefit of this ETF actually lies elsewhere

Here's what you need to know the Vanguard High Dividend Yield ETF before you buy it for passive income

What does the Vanguard ETF do

Just going by the name might lead you to believe that this ETF is all dividend yield

And yet the yield is fairly modest at just 2

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The truth is, the use of "dividend yield" in the name is simply signaling that yield is an integral part of the screening cess

And that cess is what investors need to fully understand before buying the Vanguard High Dividend Yield ETF

It's actually pretty simple

In reality, the ETF tracks the FTSE High Dividend Yield index

So what the index does, the ETF is basically doing, too

First, it creates a list of all dividend-paying companies on U

Then it arranges that list by yield, from highest to lowest

Step three is to select the top half of that list in terms of yield for inclusion in the index

The last step is to weight the stocks by market cap, so the largest companies have the biggest impact on the Vanguard High Dividend Yield ETF's performance

All of that comes for a very modest expense ratio of 0

So if the Vanguard ETF buys high-yield stocks, what's the blem

At this point, you may be wondering what the issue is since the ETF's selection cess is focused entirely on dividend yield

The key step that is easy to overlook is the first one

The Vanguard ETF's fishing pool is gigantic, which leads to a very large portfolio

With that many stocks, the Vanguard High Dividend Yield ETF has no choice but to move lower and lower down the yield spectrum as it adds to the portfolio

Every added "lower" yielding stock reduces the overall yield that the ETF can vide to investors

So if you are specifically trying to highlight yield, this ETF bably won't be the best fit for your portfolio

That said, what the Vanguard ETF does very well is vide diversification, given the huge number of stocks in the portfolio

However, it won't fully maximize the income your portfolio generates

For that, as the chart above highlights, you'll need to look elsewhere

A solid foundation, but perhaps not the "best" passive income ETF There's nothing inherently wrong with the Vanguard High Dividend Yield ETF

It does exactly what it sets out to do: buy a large and diverse list of higher-yielding stocks

The real question is whether or not that is what you want for your portfolio

If income generation is your primary goal, this ETF will bably leave you feeling shortchanged

But if you want diversification with a bias toward income, well, it could be just right

Reuben Gregg Brewer has no position in any of the stocks mentioned

The Motley Fool has positions in and recommends Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF

The Motley Fool has a disclosure policy.