VYM beats S&P 500 with 17% return by avoiding AI megacaps

What happened

The Vanguard High Dividend Yield ETF (VYM) returned 17% year-to-date through August 19, outpacing the S&P 500's 13% gain. VYM trades at a forward earnings multiple around 16, while the S&P 500 sits closer to 23. The fund's mechanical yield screen automatically excludes most megacap AI companies that reinvest rather than pay dividends, leaving top holdings like Exxon, Johnson & Johnson, AbbVie, Chevron, JPMorgan, and Coca-Cola at single-digit and low-teens valuations.

Why it matters

VYM's outperformance reflects a temporary valuation advantage—the fund owns the cheaper half of large-cap America while the index is concentrated in expensive AI leaders. However, over a ten-year period, VYM returned 207% compared with the S&P 500's 252%, showing the cost of excluding growth. The fund's 4 basis point expense ratio means investors keep gains from any valuation shift. For business leaders and investors, this illustrates the risk of concentration in AI: valuations require continued execution to justify their premium, while VYM's discount is defensible only if growth-led leadership pauses.

What to watch

VYM's relative performance depends on whether "the cheapest half of large-cap America outperforms the most expensive quarter"—a trade that has held since 2022 began but is not guaranteed to continue. The fund is unsuitable for those seeking spendable income (its quarterly distribution is irregular, most recently $0.9795 against $0.8617 the prior quarter, and yield sits well below the 10-year Treasury at 5%) or those betting the AI capex cycle will drive index returns for years ahead.