The Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY) Is Looking Overvalued and Concentrated Right Now

I've sung the praises of the Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY) plenty of times in the past, and it remains one of my favorite Canadian dividend ETFs.

The fund charges a competitive 0.22% management expense ratio, making it one of the more affordable ways to gain diversified exposure to Canada's highest-yielding blue-chip companies. Despite being marketed primarily as an income strategy, VDY has also delivered excellent total returns, generating an annualized 10-year return of 14.79% at net asset value.

The yield profile is attractive as well. VDY pays distributions monthly and currently sports a trailing 12-month distribution yield of 3.04% as of June 30, 2026. Those distributions are also relatively tax efficient for investors holding the fund in a taxable account. Because the index excludes real estate investment trusts (REITs), the vast majority of distributions qualify as eligible Canadian dividends, with only a small return of capital component in most years.

The lower yield compared with several years ago might surprise some investors, especially considering that many of VDY's underlying holdings have continued growing their dividends. The explanation is fairly simple. Dividend yield is calculated by dividing the annual distribution by the ETF's current price. As VDY's net asset value has appreciated, the denominator has increased much faster than the distributions themselves. With the ETF posting a 24.73% total return year to date, its yield has naturally compressed.

That's also where my concern begins. After such a strong rally, I think VDY is beginning to look both overvalued and concentrated. Morningstar even said something similar in August 2025. That doesn't mean I would sell VDY if I already owned it. But it also isn't an ETF I would be aggressively adding to today or making the centerpiece of a dividend portfolio.

The Portfolio Is Becoming Too Concentrated

VDY follows a straightforward methodology. It screens the Canadian equity market for companies with relatively high dividend yields and then weights the top half of them by market capitalization. The result is a portfolio of roughly 60 companies. On paper, that sounds reasonably diversified. In practice, it isn't.

Financials now account for roughly 60% of the portfolio, with Canada's largest banks dominating the top holdings. Royal Bank of Canada alone represents 16.3% of the ETF. Toronto-Dominion Bank accounts for another 11.4%, followed by Bank of Montreal at 7%, Bank of Nova Scotia at 6%, and Canadian Imperial Bank of Commerce at another 6%.

Those are all excellent businesses with decades-long histories of paying and growing dividends. But they're still cyclical financial institutions whose earnings depend on the health of the Canadian economy, loan growth, credit quality, housing activity, and interest rates.

When more than half of an ETF is concentrated in one sector, investors are taking a much larger macroeconomic bet than they may initially realize. That concentration also creates another problem.

The Largest Holdings Look Expensive

One mistake I frequently see investors make when evaluating banks is relying primarily on the price-to-earnings ratio. For industrial companies, technology firms, or consumer businesses, the P/E ratio is often a useful valuation tool. Banks are different.

Their balance sheets are effectively their business, with assets and liabilities constantly being marked, originated, and repriced. As a result, price-to-book value is generally a much more informative measure of valuation because it compares the market price of a bank with the value of its underlying net assets.

By that measure, many of Canada's largest banks have become quite expensive following their recent rally. According to Yahoo Finance, Royal Bank of Canada currently trades at 3.16 times book value. Toronto-Dominion trades at 2.48 times, Bank of Montreal at 2.09 times, Bank of Nova Scotia at 1.94 times, and Canadian Imperial Bank of Commerce at 2.59 times.

Two of the richest valuations, Royal Bank and TD, also happen to be the ETF's two largest positions. In other words, VDY is allocating a significant portion of investor capital toward the names that already command some of the highest valuation multiples within the portfolio.

The Bottom Line on VDY

None of this is a call to sell VDY. I still think it's one of the better Canadian dividend ETFs available, with low fees, tax-efficient distributions, and a long history of delivering attractive total returns.

My concern is simply that today's valuation backdrop looks much less favorable than it has in the past. An index methodology that has worked extremely well for years doesn't automatically remain attractive if investors bid the largest holdings to increasingly rich valuations.

At the same time, the portfolio has become heavily concentrated in a handful of Canadian banks. While those are outstanding businesses, the whole point of using an ETF is to gain diversification. Today, VDY doesn't provide as much diversification as many investors probably assume.

For existing shareholders, I don't see a compelling reason to sell. For new money, however, I'd be more cautious. Paying premium valuations for an increasingly concentrated portfolio isn't usually a recipe for strong long-term returns.