Vanguard FTSE All-World High Dividend Yield ETF: July 2023 update

• Vanguard is a pioneer in index investing
• This ETF provides exposure to large and medium-sized companies across the world that generally pay higher than average dividends
• This ETF offers a low-cost way of tracking the performance of the FTSE All-World High Dividend Yield Index

How it fits in a portfolio

An ETF is a basket of investments that often includes shares or bonds. They tend to track the performance of an index such as the FTSE All-World High Dividend Yield Index and trade on stock exchanges, like shares. This means their price fluctuates throughout the day.

The Vanguard FTSE All-World High Dividend Yield UCITS ETF offers a low-cost solution for tracking the performance of the FTSE All-World High Dividend Yield Index. The index is comprised of large and medium-sized company stocks from around the world, excluding real estate trusts, in developed and higher risk emerging markets that pay dividends that are generally higher than average.

An index fund is one of the simplest ways to invest and can be a low-cost starting point for an investment portfolio aiming to deliver long-term growth. ETFs that focus on the larger US companies could be used to diversify a long-term global investment portfolio, including those focused on other regions such as the UK, Europe or emerging markets, or one focused on smaller companies.

Manager

Vanguard is a pioneer when it comes to passive investing, having created the first retail index fund over 45 years ago. It now runs some of the largest index funds in the world. Given its size, it has a big investment team with the expertise and resources to help its ETFs track indices and markets as closely as possible, while having scale to keep costs down.

Vanguard ETFs are run by a large, global team. They’re spread across three investment hubs around the world – the US, UK and Australia. This team-based approach means there’s no named manager on the ETF.

Vanguard also has a trading analytics team, which is responsible for ensuring the ETFs buy and sell investments efficiently and at a competitive cost. This involves analysing data from different brokers and banks. Lower costs should help the ETFs track their benchmarks as closely as possible.

Process

This ETF aims to track the performance of the index by investing in most companies, and in line with each company’s index weight. This is known as partial replication and can help the fund track the index very closely without the cost of buying all the small positions in the index which can be costly to trade.

Reducing costs is a key part of keeping the performance difference between the ETF and the benchmark to a minimum. In any ETF, taxes, dealing commissions and spreads, and the cost of running the fund all drag on performance. To help keep these costs down, the team aims to make large investments in companies instead of lots of small transactions.

Real estate investment trusts are removed from the index, as are stocks that are forecast to pay a zero dividend over the next 12 months. The remaining stocks are ranked by annual dividend yield and included in the index until the collective total market value of the companies reaches 50% of the total market value of all companies for the universe of stocks.

The ETF currently has a large weighting in North America which makes up 46.5% of the fund, followed by Europe and Pacific companies which account for 25.5% and 16.0%, respectively.

With the income focus there’s also a high weighting to the financial sector which makes up 24.8% of the ETF followed by consumer staples and health care.

Vanguard will also lend some of the investments in the ETF to other providers in exchange for a fee, which can reduce the costs for investors, though this adds risk. Vanguard will only lend securities to a limited number of approved dealers. They indemnify the fund against any loss from this process, meaning there should be no negative impact on investors. Derivatives can also be used which adds risk.

Culture

Vanguard is currently the second largest asset manager in the world and runs just over $7.2trn of assets globally as of December 2022. The group aims to put the client at the forefront of everything it does, which drives its focus on quality, low-cost index products.

Jack Bogle founded Vanguard in 1975 and it’s owned by investors. This allows Vanguard to redirect its profits back to investors in the form of lower fees, instead of paying dividends to external shareholders. Bogle believed in creating products that simply track the performance of a market rather than taking a shot at picking individual stocks which may beat them.

The team running this ETF works closely with other fixed income research and risk departments across the business. They have daily and weekly meetings to discuss ongoing strategy which could add good support and challenge on how to run the ETF effectively.

ESG Integration

Vanguard is predominantly a passive fund house and has offered exclusions-based passive funds for many years. Though it’s lagged peers in offering passive funds that explicitly integrate Environmental, Social and Governance (ESG) criteria by tracking indices that tilt towards companies with positive ESG characteristics, and away from those that don’t.

Vanguard’s Investment Stewardship team, which consists of over 60 people, carries out most of the firm’s voting and engagement activity. Their stewardship activity is grounded in the firm’s four principles of good governance: board composition and effectiveness, oversight of strategy and risk, executive compensation and shareholder rights. The Stewardship team also produces frequent insights on their engagement activity at both a corporate and governmental level.

In December 2022, Vanguard left the Net Zero Asset Management initiative, a group of asset managers that have committed to achieving net zero carbon emissions by 2050. We view this as a disappointing backward step, but we’re encouraged that the company will continue to engage with companies on climate-related issues.

Cost

The ETF currently has an ongoing annual fund charge of 0.29%. There are no charges from HL to hold ETFs within the HL Fund and Share Account. The annual charge to hold ETFs in the HL ISA or SIPP is 0.45% (capped at £45 p.a. in the ISA and £200 in the SIPP). Ensuring an ETF has a low charge is an important part of tracking the underlying index closely.

As ETFs trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges within any Hargreaves Lansdown account.

Performance

The ETF aims to track the FTSE All-World High Dividend Yield Index and has done a good job of this, returning 113.01%* versus 129.28% for the index over the last 10 years. As expected from an ETF, it’s fallen behind the benchmark over the long term because of the costs involved. However, the tools used by the managers have helped keep performance close to the index. Past performance is not a guide to the future.

Interest rate hikes have been a key theme for markets through 2022 and have continued into 2023. But having raised interest rates 10 times since March 2022, the US Federal Reserve held rates steady at the 5%-5.25% range in June, noting it wanted more time to assess the impact of rate hikes so far.

With US prices rising 4% in the 12 months to May, and remaining above target, higher interest rates could resume should inflation not fall further. That said, it’s possible the rate rises have stopped, as the central bank balances controlling inflation and the risk of tipping the economy into a deep recession.

Given Vanguard’s size, experience and expertise, we expect the ETF to continue to track the benchmark well in the future, though there are no guarantees.

Past performance is not a guide to the future. Source: *Lipper IM to 30/06/2023.

Chart showing rolling 5 year share price performance

Past performance isn't a guide to the future. Chart provided by FactSet, data typically delayed by 2 or more trading days. Updated daily.

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