Some exchange-traded funds (ETFs) are worth keeping around for the long haul, especially if it’s your goal to let compounding work its magic. In this piece, we’ll check in on one specific ETF that’s been my go-to for quite a while. And though there are many worthy candidates to add to your hands-off passive ETF portfolio, a name that keeps coming back to is Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY).
With a yield just shy of 3.3%, the VDY might not seem like all that great of a high-yield ETF, especially when you consider some of the ETFs out there that incorporate covered calls for the added yield boost.
When you could score a higher-yielding ETF with a distribution yield well north of 4% or even above 5% if you’re comfortable paying a slightly higher management expense ratio (MER) for a covered call ETF, why settle for a 3.3% yield on an index ETF by Vanguard?
The MER is about as low as it gets for dividend ETFs, currently at 0.22%. Beyond the low MER, though, is the mix of stocks underneath the hood. You’re getting some of the obvious mega-cap dividend payers (and growers) found on the TSX Index. And, of course, there’s a lot of overlap with a run-of-the-mill TSX Index ETF.
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So, why not just go for an even lower-cost TSX Index ETF?
It all boils down to the allocation. In the VDY, you’re getting more concentration on fewer names and more of a tilt towards those mega-cap cash cows, the kinds with solid balance sheets and very generous dividends and dividend growth. If you want more of what makes the TSX Index so robust (at least when it comes to the top holdings), I’d argue that the slightly higher MER makes the VDY’s unique mix (larger, dividend-heavy) more worth it.
While there’s absolutely nothing wrong with going down the route of a more traditional indexer by betting on the broad Canadian economy with the likes of a TSX Index ETF, I find that there could be greater rewards by tilting in favour of size and dividends. In my view, concentrating on the top dividend payers of the TSX is a better move, especially if you don’t want to have dividend heavyweights diluted out by a plethora of small positions in low-to-no-yielders or software firms that have fallen under pressure from AI.
Of course, a notable exclusion from the VDY is Shopify (TSX: SHOP), a highly volatile and arguably expensive (at least compared to banks and oil producers!) tech play with a 2.6 beta that doesn’t even pay dividends. Of course, if you’re growth-oriented and want to capitalize on the rise of AI and the agentic commerce boom, excluding Shopify stock from the mix might be less than desirable.
Why the VDY is my go-to over the TSX Index
In my view, it makes more sense to buy the VDY and purchase shares of individual tech names that are underrepresented in the TSX Index separately. Indeed, the TSX Index might be broadly diversified across Canada’s economy, but that doesn’t mean you’re getting better diversification (I think the TSX Index needs a supplement anyway, given the light weight of the tech and staples sectors).
At the end of the day, the TSX Index and the VDY are both heavy in the financials and energy sectors.
The VDY just takes it another step further. And, of late, doubling down on Canada’s top two sectors has been a winning move, with the VDY up 44% in the past year, beating the TSX Index’s 33% gain and the S&P 500’s 25% gain. In short, investors might come for the yield, but stay for the TSX-beating capital gains potential.
