VYM Is Great, But Vanguard’s Other High Yield ETF Pays Twice As Much

The growing demand for artificial intelligence (AI) has given a boost to the stock market. Tech stocks have led the market higher, and there’s been growing demand for AI products and services that have helped companies achieve higher valuations. Since valuations for many stocks have hit sky-high, investors have become cautious and are looking for low-cost alternatives to park their money. If you’re looking to put your money in tech stocks with little risk, consider exchange-traded funds (ETFs). Picking individual stocks can be challenging which is why ETFs can be an ideal option for the long haul. 

Vanguard is a popular name in the world of ETF investing and it offers a wide range of options for you to choose from. Vanguard has ETFs that can fit every investor’s criteria. One of the most popular ETF, the Vanguard High Dividend Yield ETF (NYSEARCA:VYM | VYM Price Prediction) is a top choice for income investors. It has a yield as high as 2.39% and holds over 500 stocks. VYM has an expense ratio of 0.06% and offers ultimate diversification. However, there’s another Vanguard ETF that pays twice as much. Here’s a closer look at Vanguard High-Yield Active ETF. 

An attractive yield 

The actively managed fund invests in a range of below investment-grade bonds, also known as “junk bonds.” It aims to outperform the broader high-yield market. Junk bonds are high-yield bonds that also carry higher risk due to the lower credit rating. They represent debt issued by financially struggling companies and also offer a higher yield to compensate for the risk of default. Junk bonds have a higher risk as compared to fixed-income securities. 

The Vanguard high-yield active ETF has a yield of 6.20% and an expense ratio of 0.22%. It holds 233 bonds with an average duration of 2.9 years. Most importantly, the fund pays monthly dividends. Some of its bonds have a coupon rate higher than 10%, but it comes at a risk.  

High risk, higher returns

VGHY has assets worth $80 million and offers high diversification. It invests 45.58% in BB rated bonds, 35.58% in B rated bonds and 10.98% in U.S. government bonds. Further, 55% of bonds have a maturity between 1 to 5 years, and 40% of bonds have a duration of 5 to 10 years. In terms of sector, 72% bonds are from the industrial sector and 10% are in the finance sector. 

If you’re okay with tolerating the risk, you can enjoy steady passive income each month. It has a high risk-return ratio and can easily outperform VYM’s returns. Since the fund is exposed to lower-credit-quality securities, it is subject to credit risk and interest rate risk. A rise in interest rates could lead to a drop in bond prices. The ETF recently announced a monthly dividend of $0.3254.

Exchanging hands for $75.28, the fund has remained flat throughout the year. However, its potential to generate steady income attracts investors. VGHY is ideal for those who seek regular passive income and are happy to receive a paycheck each month.