If you have been checking your portfolio every morning this year, you already know the tension. The S&P 500 has gone practically nowhere; the biggest tech names have pulled back. Tariff headlines land daily, and the pressure to make a move keeps building.
Most investors have overlooked a quieter story playing out alongside the volatility. One of the least-discussed Vanguard ETFs has posted one of the strongest starts to a year among the firm’s entire fund lineup. VYM is up approximately 5% year to date, per Dividend.com.
The S&P 500, which many investors assume leads everything, has been essentially flat over the same stretch. An 8-point spread between a dividend ETF and the cap-weighted benchmark says something important about where institutional money has been flowing.
The rotation driving that spread has implications for how you build and rebalance your portfolio over the rest of the year.
VYM is beating the S&P 500, and the reason is structural
The Vanguard High Dividend Yield ETF tracks the FTSE High Dividend Yield Index, a broad collection of U.S. large-cap companies that pay above-average dividends while excluding REITs. As of early March 2026, VYM manages more than $84 billion in net assets, holds roughly 560 stocks, and charges just 0.04% in annual fees, according to Vanguard.
The outperformance traces to a rotation happening underneath the index-level numbers. Eight of 11 S&P 500 sectors have reached new all-time highs this year, according to U.S. Bank. But the cap-weighted index, dominated by mega-cap tech, has barely moved because its heaviest names stalled.
VYM sidesteps that concentration problem entirely. Its heaviest allocations sit in financials, health care, industrials, and energy, all of which have led the market in early 2026.
While the Magnificent 7 weighs on the S&P 500, VYM continues to climb because the fund is invested in the sectors that are actually advancing.
562 dividend stocks and a 0.04% expense ratio under the hood
VYM does not chase the highest possible yield. The fund sweeps in the higher-yielding half of the large-cap dividend-paying universe and weights holdings by market capitalization. That construction tilts the portfolio toward bigger, more established companies and spreads single-stock risk across hundreds of names.
Top VYM holdings as of January 2026:
- Broadcom (AVGO): 6.95% of assets
- JPMorgan Chase (JPM): 3.63%
- ExxonMobil (XOM): 2.71%
- Johnson & Johnson (JNJ): 2.48%
- Walmart (WMT): 2.35%
Broadcom adds a growth dimension through its expanding AI semiconductor business. JPMorgan and ExxonMobil benefit from the financials-and-energy rally. Johnson & Johnson and Walmart anchor the fund with defensive stability, according to holdings data from Robinhood.
More Dividend stocks:
- Tim Cook quietly hands Apple investors a surprise pay raise
- Nancy Pelosi sells $1M of struggling dividend stock
- Verizon’s $20 billion acquisition resets dividend outlook
Morningstar analyst Bryan Armour gave VYM a High Process Pillar rating in his November 2025 review. He wrote that the fund balances higher-yielding stocks against distressed yield traps and that its market-cap weighting pulls the portfolio toward larger, more stable firms, according to Morningstar.
The fund currently yields about 2.5% with a trailing P/E near 20.3 and a five-year beta of 0.74, per Dividend.com.
The 2026 growth-to-value rotation is playing directly into VYM’s hands
A fund that has been around since 2006 does not suddenly land on performance leaderboards without a reason. Market leadership has shifted decisively from growth to value in 2026, and VYM is built for exactly this kind of environment.
The numbers tell you where the money is going
By mid-February, the equal-weighted S&P 500 was up about 5.5% year to date while the standard cap-weighted version sat roughly flat, according to NAI 500. That divergence means the average stock in the index has been performing well.
The drag is coming almost entirely from the largest tech names retreating from elevated valuations.
Three forces behind the shift:
- The Federal Reserve has cut the fed funds rate to 3.50%-3.75%, making dividend stocks more competitive against bonds and money market funds, according to U.S. Bank.
- Tariff uncertainty and Middle East geopolitical tensions have pushed institutional capital toward defensive, income-generating sectors.
- Midterm elections have historically brought elevated volatility, and dividend-paying stocks tend to hold up better during drawdowns.
Midterm election years have historically punished stocks
Since 1957, the S&P 500 has suffered an average intra-year drawdown of 18% during midterm election years and has entered correction territory about 70% of the time, according to Motley Fool analysis of FactSet data. Add tariff-driven trade friction on top of that historical pattern, and 2026 could deliver sharper swings than most investors expect.
VYM’s lower sensitivity to broad market moves offers a cushion against that kind of volatility. The fund’s five-year beta of 0.74 means it typically absorbs only about 74% of the S&P 500’s swings.
Its beta of 0.74, according to Morningstar, indicates a meaningfully lower sensitivity to market swings than the broader S&P 500. When the broad market drops 5% in a week, a VYM position would historically fall closer to 3.5% to 4%.
Smaller drawdowns lead to faster recoveries, and collecting 2.5% in dividends annually while the market sorts itself out keeps the compounding math working in your favor through the rough stretches.
VYM has real limits worth weighing before you commit
VYM has clear trade-offs, and understanding them matters before you allocate serious capital to the fund.
VYM trails the S&P 500 over long tech-led bull runs
Over the past decade, VYM returned roughly 12.1% annualized, compared to about 15.6% for the S&P 500 Total Return Index, according to a Schwab ETF report card. When technology stocks lead, VYM will lag. You give up some upside in exchange for lower volatility and income.
A 2.5% yield may fall short for income-focused investors
If your primary goal is maximizing current income, funds like the JPMorgan Equity Premium Income ETF (JEPI) deliver yields closer to 8%, though with capped upside potential. VYM emphasizes total return with a dividend component rather than maximum yield alone.
Broadcom’s 7% weighting creates an unusual concentration risk
Broadcom accounts for nearly 7% of the fund, a level that is unusually heavy for a diversified ETF. If Broadcom’s AI-driven rally reverses, VYM would absorb that decline more heavily than most dividend funds.
Morningstar flagged this kind of sector deviation in its review, noting that VYM’s yield screen can concentrate in unexpected areas during market extremes.
How to position VYM in your portfolio right now
VYM works best as a core anchor rather than a satellite holding. It generates income, reduces overall portfolio volatility, and frees up room to take more concentrated positions elsewhere with individual stocks or growth ETFs.
Four things to evaluate before buying:
- Check your existing holdings for overlap: VYM shares significant common ground with the Vanguard Value ETF (VTV) and similar large-cap value funds. Stacking both gives you concentration, not diversification.
- Think about your account type: VYM distributes taxable dividends every quarter. Holding the fund inside a Roth IRA or 401(k) eliminates that tax drag and lets your dividends compound untouched.
- Be prepared for VYM to lag if tech rebounds: When the Magnificent 7 regain momentum, cap-weighted indices will pull ahead again. VYM is a play on broad market participation, not growth leadership.
- Consider dollar-cost averaging during volatile stretches: Buying when VYM dips means your purchase price is lower, and each dollar you invest generates more dividend income going forward.
Steady compounding is winning in 2026, and VYM is built for it
VYM will never double in a year, and it will never generate the kind of excitement that drives viral stock picks. The fund has, however, compounded at roughly 9.3% annually since its 2006 launch, paid investors every quarter, and held its ground during periods when growth stocks fell apart, according to Motley Fool reporting.
With 562 holdings, a 0.04% expense ratio, and exposure to the sectors leading this year’s rotation, VYM has earned its place as a core portfolio building block. If 2026 continues to reward value, income, and defensive positioning, this is where you want a meaningful portion of your money working.
And even if the rotation stalls, VYM pays you 2.5% annually while you wait. For most investors, that kind of consistency matters more than any single blockbuster quarter.
Related: JPMorgan delivers a stark message for investors in stocks
