VIG - VIG: A Cheaper Alternative To NOBL

Summary

• Both VIG and NOBL offer exposure to stocks with a considerable history of consistent dividend growth.
• While the dividend increase history must be at least 25 years for inclusion in NOBL, 10 years are enough for VIG.
• However, the cost structure of VIG is superior with an expense ratio of just 0.06%, due to construction differences.
• In terms of performance the ETFs are very similar and exhibit high correlation, despite only 28.1% overlap.

Most investors like consistent dividends. When it comes to achieving diversified exposure to such equities, ETFs come to the rescue. Probably the popular instrument that includes only dividend aristocrats - the ProShares S&P 500 Dividend Aristocrats ETF ( NOBL ) is one of the logical choices. However, another instrument that may fit the purpose is the Vanguard Dividend Appreciation ETF ( VIG ). While it doesn't go as far as requiring 25 years of dividend increase history, but sticks to only ten, it has some advantages. Due to its construction nature, VIG offers a much leaner cost structure to its investors, with an expense ratio of only 0.06%. In terms of performance, the results of both ETFs are pretty similar and there's a high correlation between them, despite only 28.1% overlap in holdings.

VIG and NOBL overview

VIG is constructed to track the performance of the S&P U.S. Dividend Growers Index using a full replication technique, without leaving any leeway to management. The index itself is pretty simple in terms of construction methodology :

The S&P Dividend Growers Index Series measures the performance of companies that have followed a policy of consistently increasing dividends every year for a specified number of years. The indices are subject to an indicated annual dividend yield exclusion, with the top 25% highest yield ranked eligible companies from the index universe excluded from index inclusion. Companies classified as part of the Global Industry Classification Standard ((GICS)) Real Estate Investment Trust Industry (REITs), are excluded. Constituents are float-adjusted market capitalization ((FMC)) weighted, subject to a single constituent weight cap of 4%.

When it comes to the specific number of years of dividend growth, it's 10 years for US companies and 7 years for non-US entities. The market-cap weighting nature of the index makes the ETS self-rebalancing, allowing for a very lean cost structure with an expense ratio of 0.06%.

NOBL is designed to fully replicate the performance of the S&P 500 Dividend Aristocrats Index. According to NOBL's prospectus :

The Index contains a minimum of 40 stocks, which are equally weighted, and no single sector is allowed to comprise more than 30% of the Index weight. If there are fewer than 40 stocks with at least 25 consecutive years of dividend growth or if sector caps are breached, the Index will include companies with shorter dividend growth histories. The Index is reweighted each January, April, July and October, with an annual reconstitution during each January

Maintaining equal weighting obviously exhibits higher rebalancing costs, which explains the much higher expense ratio of NOBL at 0.35% - almost 6x that of VIG.

In terms of dividend yield, the ETFs are pretty much identical, with only 0.03% nominally higher rate for VIG at 1.91%. However, when it comes to dividend CAGR, NOBL has a slight advantage over a 5-year historical period, but lags considerably behind VIG in a shorter 3-year lookback period. A notable difference is that in 2022 NOBL failed to make a greater annual payout than the previous year, nullifying its consecutive growth track record.

In terms of holdings, although NOBL has much less holdings, an argument could be made that it's more diversified due to its equal weighting nature, while VIG although contains more constituents, it's more concentrated in its top positions. When it comes to sector exposure, the ETFs share some similarities, for example the low weight of cyclical industries like energy, services and durables. However, the total overlap between the holdings of the ETFs is just 28.1%.

Performance comparison

Taking a look at the performance track record, it appears that despite the 71.9% difference in holdings, the two instruments have been pretty much identical when it comes to performance and exhibit very high correlation with each other. While NOBL seems to be slightly better, in the period after the lockdowns-induced drop in 2020, VIG's higher exposure to Financials and IT has led to a bit better results than that of the counterpart.

In terms of risk-adjusted return, the data indicates that NOBL is better as it has a higher Sharpe ratio. However, the differential between the ETFs has been shrinking lately.

In terms of risk-adjusted return, the data indicates that NOBL is better as it has a higher Sharpe ratio. However, the differential between the ETFs has been shrinking lately.

When it comes to comparing the ETFs on a plethora of categorical characteristics, the Seeking Alpha ETF Grades tool offers some interesting insights. VIG has better or equal scores in every category, except risk. This is understandable, since NOBL's constituents have a much longer history of dividend increases, which withstood the dotcom bubble and the great financial crisis.

Takeaway

The Vanguard Dividend Appreciation ETF seems to be offering a good alternative to the ProShares S&P 500 Dividend Aristocrats ETF for investors who seek exposure to consistent and growing dividends. The expense ratio of VIG is much lower, due to its market-capitalization weighting nature. In terms of performance, the ETFs have been pretty much in line with each other as indicated by the very high correlation between them.

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