When accounting for global and international funds, there are hundreds of dividend exchange traded funds available to advisors and investors.
Market participants are clearly fans of these products as nearly 10 have at $15 billion in assets under management and dozens more have $1 billion-plus in AUM. Over time, dividend index methodology has evolved and more actively managed products have entered the arena, but when examining the legacy ETFs in the space, end users are apt to find two primary weighting methodologies: yield or dividend increase streaks.
Focusing on the latter, that’s the strategy employed by the Vanguard Dividend Appreciation ETF (VIG), which happens to be the largest ETF in the dividend category and by a wide margin at that. VIG is closing in on $98 billion in assets under management while the second-place ETF is at $71. 8 billion.
Speaking of that competition, it’s not much of a rivalry at all because for the 10 years ending Sept. 15, VIG returned 246. 8%, including paid dividends, compared to 211. 8% for its competitor, according to ETF Replay data. VIG was also slightly less volatile during that time.
VIG Pros and Cons
The above comparison doesn’t necessarily mean VIG is the “best” dividend ETF. It’s beaten some of its competitors while also falling short of returns offered by other members of the category. But overall, the Vanguard fund is sensible for many end users.
Importantly, the strategy is easy to understand. VIG tracks the S&P U. S. Dividend Growers Index, which is a collection of domestic large-cap stocks that have boosted payouts for at least 10 straight years. From that selection universe, the highest yielders are removed, implying the VIG portfolio leans into quality companies that can sustain and grow dividends. Even with those mandates, the ETF has a fairly deep bench of 337 components. VIG’s strict protocols cut both ways.
“For example, Apple and ExxonMobil didn’t join the portfolio until 2023, after a decade of increasing dividends,” notes Bryan Armour of Morningstar. “Still, this is a worthwhile trade-off that keeps the portfolio full of high-quality companies that should continue to increase their dividends. ”
The rub with any fund, including VIG, rooted in dividend increase streaks is potential vulnerability to missing out on big gains notched by new dividend payers. Apple (AAPL) is currently VIG’s fourth-largest holding, but as noted above, it didn’t enter the ETF until 2023. Over the decade leading up to that inclusion, the iPhone maker notched jaw-dropping performance. The same could be true of Alphabet (GOOG), which initiated a dividend in 2024 and increased it this year, meaning its nine years away from joining VIG.
VIG a Solid Choice for Many Investors
Even with the trade-offs associated with its index construction, VIG is a solid idea for many equity income investors and with an annual fee of just 0. 05%, it lives up to the Vanguard heritage of being cost-effective.
VIG’s low fee is important for another reason. It makes the ETF suitable for buy-and-hold investors and that’s exactly the style applicable to dividend investing, particularly investing for rising payouts. A favorable volatility profile also makes the fund appealing to long-term investors.
“Lower volatility is key to this fund’s success. It tends to outperform when markets drop, like when it beat the category index by 10 percentage points in 2022,” adds Armour. “The drawback is its potential for lackluster returns when markets trend higher. Indeed, the US ETF share class returned 19% in 2024 yet underperformed its category index by 7 percentage points. Crucially, the fund has proved its ability to capture more of the market’s upside than downside, giving it an edge over its bogy in the long term. ”
