Two ETFs Offering Yield, Growth, And Potential Outperformance

The article suggests two ETFs, Vanguard International High Dividend Yield ETF (VYMI) and Fidelity Fundamentals Large Cap Core ETF (FFLC), as potential outperformers for investors seeking yield and growth amid expensive U.S. equity valuations. VYMI offers diversification outside the U.S. with a 4%+ yield and a focus on European and emerging markets, while FFLC is growth-focused with exposure to U.S. large-cap tech stocks and a slightly higher expense ratio; both ETFs have shown strong past performance relative to benchmarks, but carry risks including international exposure for VYMI and limited liquidity for FFLC.

Analysis

The current market environment is characterized by elevated U.S. equity valuations, with the S&P 500 trading above 6,000 despite negative news, leading to concerns about a potential correction and prompting investors to seek value. Lingering inflation and the potential for its resurgence due to tariffs underscore the importance of investing to preserve capital. The analysis highlights two specific ETFs as potential solutions: the Vanguard International High Dividend Yield ETF (VYMI) and the Fidelity Fundamentals Large Cap Core ETF (FFLC). VYMI offers diversification away from potentially overvalued U.S. markets, providing a dividend yield exceeding 4% and significant exposure to European (44.50%) and emerging markets (21%). It has outperformed both the S&P 500 and the Schwab U.S. Dividend Equity ETF (SCHD) in the past year, supported by $10.99 billion in net assets and a low expense ratio of 0.17%. Notably, U.S. investors have recently increased allocations to European and emerging market assets, with European funds seeing an influx of $82.5 billion last month, their highest in four years, driven by more attractive valuations compared to U.S. equities. VYMI's distributions, while mostly qualified, have a portion taxed as ordinary income, though this is expected to improve for 2025. FFLC, conversely, focuses on U.S. large-cap growth, primarily in the Technology Sector (nearly 28%), and is presented as a complement to VYMI. While its dividend yield is below 1%, FFLC has an expense ratio of 0.38% and under $1 billion in net assets. It offers more exposure to Healthcare (9.39%) and Consumer Defensive (4.06%) sectors compared to SCHG, potentially providing downside protection in a volatile or recessionary environment, which the article suggests is likely in the next 6-12 months. FFLC has outperformed the S&P 500 in price returns over the past three years and both the S&P 500 and SCHG in total returns over five years (142.38% vs 139.89% for S&P). Risks include VYMI's potential underperformance relative to U.S. peers if U.S. equities rally strongly, and FFLC's relatively new status, smaller asset base implying lower liquidity, and the general caveat that past performance is not indicative of future returns.

Key Decisions for Investors

• Investors concerned about high U.S. equity valuations and seeking income alongside international diversification may consider VYMI, given its 4%+ yield, recent outperformance, and exposure to potentially undervalued European and emerging markets.
• For those prioritizing U.S. large-cap growth but seeking a degree of defensive positioning, FFLC offers a technology-focused portfolio with enhanced exposure to healthcare and consumer staples, though its smaller AUM and higher expense ratio relative to VYMI warrant consideration.
• Monitor U.S. investor flows into international equities and the valuation gap between U.S. and ex-U.S. markets, as continued shifts could further benefit VYMI, while a resurgence in U.S. market dominance might favor domestic-focused strategies.
• Evaluate the tax implications of VYMI's distributions if held in taxable accounts and be mindful of FFLC's lower liquidity due to its sub-$1 billion AUM when making allocation decisions.