Making its debut on 04/21/2006, smart beta exchange traded fund Vanguard Dividend Appreciation ETF (ETF:VIG) provides investors broad exposure to the Style Box - Large Cap Blend category of the market.
What Are Smart Beta ETFs?
Market cap weighted indexes were created to reflect the market, or a specific segment of the market, and the ETF industry has traditionally been dominated by products based on this strategy.
Because market cap weighted indexes provide a low-cost, convenient, and transparent way of replicating market returns, they work well for investors who believe in market efficiency.
On the other hand, some investors who believe that it is possible to beat the market by superior stock selection opt to invest in another class of funds that track non-cap weighted strategies--popularly known as smart beta.
Non-cap weighted indexes try to choose stocks that have a better chance of risk-return performance, which is based on specific fundamental characteristics, or a mix of other such characteristics.
Even though this space provides many choices to investors--think one of the simplest methodologies like equal-weighting and more complicated ones like fundamental and volatility/momentum based weighting--not all have been able to deliver first-rate results.
Fund Sponsor & Index
The fund is managed by Vanguard. VIG has been able to amass assets over $63.70 billion, making it one of the largest ETFs in the Style Box - Large Cap Blend. Before fees and expenses, VIG seeks to match the performance of the NASDAQ US Dividend Achievers Select Index.
The S&P U.S. Dividend Growers Index consists of common stocks of companies that have a record of increasing dividends over time.
Cost & Other Expenses
For ETF investors, expense ratios are an important factor when considering a fund's return; in the long-term, cheaper funds actually have the ability to outperform their more expensive cousins if all other things remain the same.
Annual operating expenses for VIG are 0.06%, which makes it one of the least expensive products in the space.
The fund has a 12-month trailing dividend yield of 1.87%.
Sector Exposure and Top Holdings
It is important to delve into an ETF's holdings before investing despite the many upsides to these kinds of funds like diversified exposure, which minimizes single stock risk. And, most ETFs are very transparent products that disclose their holdings on a daily basis.
This ETF has heaviest allocation in the Information Technology sector - about 20.10% of the portfolio. Healthcare and Consumer Staples round out the top three.
Looking at individual holdings, Johnson & Johnson (NYSE:JNJ) accounts for about 3.84% of total assets, followed by Microsoft Corp. (NASDAQ:MSFT) and Unitedhealth Group Inc. (NYSE:UNH).
VIG's top 10 holdings account for about 29.33% of its total assets under management.
Performance and Risk
Year-to-date, the Vanguard Dividend Appreciation ETF has lost about -9.69% so far, and is down about -2.29% over the last 12 months (as of 08/01/2022). VIG has traded between $138.64 and $172.21 in this past 52-week period.
The fund has a beta of 0.85 and standard deviation of 22.01% for the trailing three-year period, which makes VIG a medium risk choice in this particular space. With about 291 holdings, it effectively diversifies company-specific risk.
Alternatives
Vanguard Dividend Appreciation ETF is an excellent option for investors seeking to outperform the Style Box - Large Cap Blend segment of the market. There are other ETFs in the space which investors could consider as well.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL) tracks S&P 500 DividendAristocrats Index and the iShares Core Dividend Growth ETF (DGRO) tracks Morningstar US Dividend Growth Index. ProShares S&P 500 Dividend Aristocrats ETF has $10.30 billion in assets, iShares Core Dividend Growth ETF has $23.56 billion. NOBL has an expense ratio of 0.35% and DGRO charges 0.08%.
Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Style Box - Large Cap Blend.
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