The Vanguard Australian Shares High Yield ETF (ASX: VHY) is a popular option for investors looking for passive income from ASX shares. At the same time, exchange-traded funds (ETFs) can offer investors diversification. Diversified passive income sounds like a good combination, right?
Many of the ASX-listed ETFs are not known for large dividend yields, particularly ones that give exposure to international shares. ETFs pass through the dividend income they receive to the ETF investors, so if the underlying businesses of an ASX ETF have a low yield, then the ASX ETF itself will have a low dividend yield.
Instead of just investing in the S&P/ASX 200 Index (ASX: XJO) or the S&P/ASX 300 Index (ASX: XKO), the VHY ETF has a more refined strategy to unlock passive income. So, let's look at how this ASX ETF achieves that.
This fund, put together by low-cost ETF provider Vanguard, offers exposure to companies on the ASX that have higher expected dividends relative to other ASX shares.
According to Vanguard, the forecasted dividend yield from its portfolio is 4.6% for the next 12 months (according to FactSet).
Its top 10 holdings are some of the biggest and strongest businesses on the ASX including Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), Telstra Group Ltd (ASX: TLS), Transurban Group (ASX: TCL), Rio Tinto Ltd (ASX: RIO), ANZ Group Holdings Ltd (ASX: ANZ), Woodside Energy Group Ltd (ASX: WDS) and Macquarie Group Ltd (ASX: MQG).
Combined, the 67 holdings in the portfolio provide a solid cash dividend.
An added bonus to investing in ASX shares/companies is that they can attach franking credits to the dividends they pay. These credits are generated when Australian companies pay income tax to the Australian Taxation Office.
Franking credits can reduce the tax burden for Aussies in a higher tax bracket. For Aussies that pay no or lower levels of tax, franking credits can lead to some/all of the franking credits being refunded after lodging a tax return.
Similar to ASX shares, the VHY ETF, passes through the franking credits they receive from Australian companies.
Pleasingly, the addition of franking credits boosts the yield offered by the VHY ETF. According to Vanguard, the VHY ETF has a forecast grossed-up dividend yield of 6.1%, including franking credits.
Vanguard tries to ensure the fund is diversified by limiting exposure to any particular company or sector.
The VHY ETF is restricted to investing 40% of its portfolio in just one sector, while the allocation to a specific company is limited to 10%. Australian real estate investment trusts (REITs) are excluded from this fund.
According to Vanguard, at the end of April 2025, these were the following industry weightings: financials (40%), resources (21.4%), energy (10.4%), industrials (9.1%), telecommunications (6.6%), consumer staples (4.7%), consumer discretionary (4.5%), utilities (3.1%) and technology (0.1%).
Overall, the VHY ETF seems like a solid option for passive income because of its high level of forecast dividends, as well as the efforts to keep the fund adequately diversified.
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