When browsing for a suitable investment, investors should not judge an exchange traded fund by its cover. It is important to peek inside a fund’s inner workings, lest you come across an unwanted surprise.

The search for yield has brought dividend funds to the forefront of the current market landscape. However, varying ETFs offer different strategies, even if they seem like interchangeable investments. [Dividend ETFs: Examining Yields, Returns and Risk]

Let’s take a look at a couple dividend ETFs managed by Vanguard. For instance, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) and the Vanguard High Dividend Yield ETF (NYSEArca: VYM) offer exposure to potentially greater yields, but the two funds follow completely different methodologies.

VIG reflects the performance of the Dividend Achievers Select Index, which tracks companies with a record of growing dividends year-over-year for the past 10 years. The fund has a 2.21% 12-month yield and a 0.13% expense ratio. [A Vanguard Dividend ETF with a Focus on Quality]

“Mergent, VIG’s index creator, doesn’t disclose its proprietary methodology, but seems to home in on companies with strong balance sheets and solid earnings growth,” according to Morningstar analyst Samuel Lee. “The result is among the highest-quality portfolios out there. However, the quality focus means VIG’s yield usually just paces the S&P 500’s.”

Sector allocations include consumer discretionary 12.9%, consumer staples 23.4%, energy 12.4%, financials 7.4%, health care 7.4%, industrials 19.9%, information technology 6.5%, materials 8.8%, telecom services 0.1% and utilities 1.2%.

In contrast, VYM tries to reflect the performance of the FTSE High Dividend Yield Index, which tracks the highest yielding stocks in the U.S., excluding real estate investment trusts, and weighted by market capitalization. The fund has a 2.99% 12-month yield and a 0.10% expense ratio.

Sector allocations include consumer discretionary 6.1%, consumer staples 19.3%, energy 13.1%, financials 10.6%, health care 12.9%, industrials 12.6%, information technology 7.9%, materials 4.2%, telecom services 5.3% and utilities 8.0%.

In comparing returns, VIG has gained 9.4% over the past three months while VYM rose 10.0%.

For more information on dividend funds, visit our dividend ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

Do NOT follow this link or you will be banned from the site!