From the launch in 1993, exchange-traded funds have emerged as an immensely popular mode of investing. Most people looking for passive investment choices opt for an ETF.
Vanguard is firmly established as a popular and cost-effective fund manager with good reason. The majority of their funds are strong performers and have the lowest fees in the sector. The two funds we are evaluating today are run by Vanguard and may have a similar low-cost structure that Vanguard is renowned for. However, that is the only commonality between these two funds.
The stock market is designed in such a way that two ETFs managed by one person will yield differing results. We are assessing two dividend funds managed by Vanguard. These are Vanguard’s ETFs; Dividend Appreciation (VIG) and High Dividend Yield (VYM). Let us see under what criteria they are eligible for addition to a portfolio?
- VIG and VYM are major dividend-oriented ETFs offered by Vanguard.
- VIG holds dividend growth stocks. These are stocks that have a record of offering rising dividends for a decade at least.
- VYM holds shares that offer higher than average dividends.
- From its launch in 2006, VIG has outperformed VYM on almost all key performance metrics.
- VYM has a history of underperforming the S&P 500 index.
- VYM has additional volatility risk compared to VIG
VIG vs. VYM: Summary
The Vanguard Dividend Appreciation ETF (VIG) comprises dividend growth stocks. These are businesses with a track record of offering increasing dividends over time. The VIG links the NASDAQ US Dividend Achievers Select Index. This index was previously called the Dividend Achievers Select Index. The VIG was launched in 2006 and is holds companies that have a record of growing dividends over the past decade.
The Vanguard High Dividend Yield ETF (VYM) links the FTSE High Dividend Yield Index. Its holdings are selected from the FTSE All-World Index, except for the listed REITs. The method of selection is ranking by forecasted dividend yield.
VIG vs. VYM: Composition
The Vanguard Dividend Appreciation ETF (VIG) comprises companies with a track record of offering rising dividends over time. The VIG links the NASDAQ US Dividend Achievers Select Index. It holds companies with large market caps and a mix of growth and value stocks.
The VYM links the FTSE High Dividend Yield Index based on the FTSE All-World Index, excluding the REITs on the index.
The VIG consists of $ 77 Bn in assets, spread over about 270 holdings in the US Large Blend segment. 48% of the funds holdings are in the large-cap value segment, while 39% are in the large-cap growth segment. Approximately 12% are in the medium-term US Treasuries.
Holdings are spread over 18% in financial services,17% in industrials, 16% in technology, and 14 % in consumer defensive and healthcare.
VYM has $ 50 Bn in assets, spread over about 400 holdings in the US Large value segment. 88% of the fund’s holdings are in the large-cap value segment, while 3% are in the large-cap growth segment.
Its holdings are spread over 23% in financial services,17% in industrials, 14% in consumer defensive, 13% in healthcare, and 10% in industrials.
VIG vs. VYM: Historical Performance
Typical Vanguard funds, both VIG and VYM, have assets under management (AUMs) of $77 Bn and %0 Bn, respectively. Their expense ratios are also relatively low at 0.06%.
The yield for the trailing twelve months (TTM) is 1.6% for VIG, while the same figure for VYM is almost double at 2.8%.
However, returns on $ 10,000 invested in VIG will yield inflation-adjusted returns of $30,000 at a CAGR of 8% (inflation-adjusted). VYM’s returns for $ 10,000 invested will yield inflation-adjusted returns of $24,000 for a CAGR of 6% (inflation-adjusted).
The better historical performance of the VIG can be seen from the chart. This improved performance means that the Dividend Appreciation (VIG) has outdone the High Dividend (VYM). Better returns, lower volatility, and a higher Sharpe ratio mean that the VIG is a better yielding fund choice.
This performance makes sense in fundamental terms as the companies that are giving out high dividends are more secure and less susceptible to market volatility. However, bear in mind that in some cases, the high dividends can foretell an unstable company and cover an upheaval in the company.
VIG vs. VYM: Fees & Tax Efficiency
Making tax-oriented investments is a plus point for effective portfolio management. Fund selection and management with an eye on fees and tax impacts helps improve returns for investors, particularly for high-income investors.
Reducing tax liabilities means that a portfolio’s taxes should be lower. Both VIG and VYM have 100% of their net income acceptable for reduced taxation under the qualified dividend income (QDI) head.
VIG vs. VYM: ESG Ratings & Impact
ESG ratings are growing in significance for wealth and asset managers. They play an important role in creating improved transparency in investment decisions.
A significant portion of investors is becoming increasingly concerned about knowing their investment’s ESG records. Knowing their portfolio’s environmental, social, and governance records is a long-sighted move to evaluate long-term issues and behavior.
The MSCI ESG Fund Ratings are made to offer better transparency and insight into any long-term risk and problems resulting from environmental, social, and governance (ESG) issues.
- The VIG ETF falls in the 71st percentile in its US Equity Income peer group and the 71st percentile in the worldwide group of almost 34,000 funds covered by the MSCI.
- Only 32% of the VIG’s assets scored an MSCI ESG Rating of AAA or AA ( which are leading in ESG), and only 1% scored an MSCI ESG Rating of B or CCC (which is the lowest ESG rating).
- The VIG’s holdings have restrained carbon emissions, based on the weighted average carbon intense secretions for every USD million sale.
- MSCI classified just 3.2% of the total income from the fund’s holdings as being green, from alternative energy), while nil of the total income was from fossil fuel-based sources like thermal coal.
- The VIG’s weighted rate of an independent board of directors is 83.8%, while women serving on boards is 32.5%.
- The VYM ETF falls in the 90th percentile in its US Equity Income peer group and the 80th percentile in the worldwide group of almost 34,000 funds covered by the MSCI.
- Only 27% of the VIG’s assets scored an MSCI ESG Rating of AAA or AA ( which are leading in ESG), and only 3% scored an MSCI ESG Rating of B or CCC (which is the lowest ESG rating).
- The VIG’s holdings have high carbon emissions, based on the weighted average carbon intense secretions for every USD million sale.
- MSCI classified just 2.5% of the total income from the fund’s holdings as being green, from alternative energy), while nil of the total income was from fossil fuel-based sources like thermal coal.
- The VYM’s weighted rate of an independent board of directors is 84.1%, while that of women serving on boards is 32.2%.
Both funds have their advantages and disadvantages. The VIG is a superior choice for investors that are looking for earning as well as price appreciation. The VIG offers income, but its price appreciation and CAGR are better over the long run. The VYM offers price appreciation but is coupled with lower income during the holding period.
If you prefer growth over stability and want to pair it with some income, VIG is a good choice for you too. Since VIG is focused on growing dividend income, companies offering increasing dividends will usually have increasing or stable revenues.
The VYM would suit you better if you are focused on more income and less price appreciation. People near retirement or looking for a vacation from active work would be better off investing in the VYM as it will deliver better income than the VIG.
This higher income is coupled with a higher volatility rate during financial crises and can be off-putting for more passive investors or those with shorter investment horizons. In short, both the VIG and VYM are good picks for investment growth. Both funds offer income support and have impressive track records of performance.
Both funds also offer Vanguards low costs, heavy diversification, and exposure to income and growth. As a stand-alone investment, the best option would be to invest in both funds to get exposure to high-income and high-growth investments.
Once again, investment is a personal decision, and you must determine your risk and return tradeoffs on your own.
The VYM is a better choice if you want income and just income and don’t mind higher risks associated with volatility and drawdowns. The prospect of making a shorter-term investment is acceptable and fits your investment strategy.
If income with higher risk, volatility, and lower growth is not your preferred combination, you will have to pick VIG for its slightly lower income but better long-term growth and stability.