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%.