Higher interest rates are often viewed as problematic for dividend stocks and the related exchange traded funds, but even with two rate hikes this year and perhaps another coming, the Federal Reserve is not scaring investors from some dividend ETFs.
The Vanguard Dividend Appreciation ETF (NYSEArca: VIG) is the largest dividend exchange traded fund trading in the U.S. and is continuing to add assets even as interest rates tick higher.
VIG targets U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years. Company stocks that issue high dividend yields can be masking their distressed books or may not be sustainable and are heading for dividend cuts. Consequently, these quality dividend ETFs try to limit the impact of these value traps by requiring a history of sustainable dividend growth.
VIG tracks the NASDAQ US Dividend Achievers Select Index (formerly known as the Dividend Achievers Select Index).
“Even as the Federal Reserve increased interest rates last week for the fourth time since the financial crisis, assets in ETFs that hold high dividend stocks hardly budged. So far in June, investors have pulled $26 million from the funds, the first monthly outflows in more than a year, but a drop in the bucket for the second-largest smart beta category after value,” reports Carolina Wilson for Bloomberg.
VIG, which had $29.6 billion in assets under management at the end of April, holds 188 stocks. Industrials are by far the ETF’s largest sector weight at 31.5% while both consumer sectors combine for just over 30% of VIG’s weight. Interest rate-sensitive telecom and utilities stocks combine for barely more than 2% of VIG’s roster.
“At 1.96 percent, VIG is yielding less than the 10-year Treasury note and around the same as the S&P 500 Index, according to data compiled by Bloomberg,” reports the news agency.
That yield is not much higher than what investors will find on the S&P 500 and well below the yields on some rival dividend ETFs. VIG’s popularity, in part, can be attributed to its low fees.
In May, Vanguard said VIG’s annual expense ratio was slightly lowered by one basis point to 0.08%, the equivalent of $8 per year on a $10,000 investment. That makes VIG less expensive than 92% of rival funds, according to Vanguard data.
For more on smart beta ETFs, please visit our smart beta channel.