VYM - VIG: A Fund Likely To Offer Decent Growth But Minimal Income

Summary

• The Vanguard Dividend Appreciation ETF has underperformed the S&P 500 and most of the major indexes over the last 10 years because of the exchange-traded fund's minimal exposure to commodities.
• The VIG ETF should perform well if inflation moderates because of the fund's exposure to cyclical industries and the fund's minimal exposure to the energy and basic material sectors.
• This Vanguard fund has paid only minimal income, and that trend is likely to continue moving forward.

Investing is much more challenging in the current economic environment. The Fed continues to raise rates, supply chain and labor shortages persist, and inflation remains a significant problem. There are also multiple competing indicators on growth and inflation that are making projecting the future even more difficult than normal.

One exchange-traded fund ("ETF") that performed reasonably well in the current inflationary environment we have been in since early 2021 is the Vanguard Dividend Appreciation ETF ( VIG) .

This fund is up nearly 10% since inflation began to accelerate significantly in March of 2021, while the S&P 500 (SP500) is only up 4.54% during that same time period.

Still, over the last 10 years, the S&P 500 is up 169.14%, the Nasdaq 100 (QQQ) is up 350.42%, and the Vanguard Dividend Appreciation fund is up 144.52%. This Vanguard fund has underperformed the major indexes for some time, and this ETF has also paid out low yields since its inception in 2006. Even though the dividend growth rate of this fund over the last five years has been 9.15%, and the dividend growth rate of this Vanguard fund over the last decade has been 7.74%, the current yield of this fund is just 1.91%, and the 4-year average yield is also low at 1.76%.

The holdings of the Vanguard Dividend Appreciation Fund are 21.16% financials, 16.39% technology, 15.14% health care, 14.98% industrials, 13.49% consumer defensives, 9.17% consumer cyclical, 4.57% basic materials, 3.12% utilities, 1.85% communication, and .14% energy. This fund also holds .21% in cash and cash equivalents. The four largest holdings of this fund are JPMorgan Chase ( JPM ), Microsoft ( MSFT ), Johnson & Johnson ( JNJ ), and UnitedHealth Group ( UNH ).

The expense ratio of this ETF is .06%, this fund has $65.9 billion dollars in assets under management ("AUM"), and the current yield is 1.91% in dividends that are paid out quarterly.

This Vanguard fund has risen by 14% per year over the last decade, primarily because of the fund's significant exposure to big cap tech and cyclical industries such as the financials, consumer cyclicals, and the industrials. Still, this ETF has just .14% of the fund's holding invested in the energy sector. This Vanguard fund isn't likely to continue to outperform in an inflationary environment, and this exchanged-traded fund also has some substantive holdings that are growing minimally, such as in the utility sector. If inflation were to moderate and growth remained stabile, this fund would be well-positioned because of this ETF's significant exposure to more cyclical sectors, and the fund's minimal energy and commodity holdings.

Still, the Vanguard Dividend Appreciation Fund is likely to offer minimal income and dividends moving forward. The Vanguard Dividend Appreciation fund has an average four-year yield of just 1.76%, which is substantively lower than several of this fund's peers. The Vanguard High Dividend Yield Fund ( VYM ) has an average four-year yield of 3.11%, and the Schwab US Dividend Equity Fund ( SCHD ) has an average four-year yield of 3.1%. The Vanguard High Dividend Yield Fund has significantly underperformed this Vanguard fund by 44% over the last decade, but the Schwab U.S. Dividend Equity Fund has outperformed this Vanguard fund by 1% per year over the last decade in addition to offering notably better dividends as well.

The main reason Vanguard Dividend Appreciation fund has offered minimal income to investors is because of this ETF's significant holdings in technology and some more cyclical consumer retail and industrial sectors. Health care and consumer defensive investments only make up 28.5% of this fund's holdings. This fund has also performed well in significant part because of the holdings in technology and more cyclicals sectors that tend to pay lower dividends. This Vanguard fund has nearly 65% of the ETF's assets in technology stocks and more cyclical sectors. So, this is a growth fund, and not an exchanged-traded fund that will likely appeal to dividend and income investors.

Investing in difficult times presents unique challenges, and the current economic environment has forced individuals who want to continue to get inflation-adjusted income and total returns to adapt in new ways. This Vanguard Dividend Appreciation ETF should have some appeal to growth investors who think inflation will moderate, but it has still consistently underperformed the Nasdaq 100 and the S&P 500. This Vanguard fund has also offered minimal income, and the ETF is likely to offer modest levels dividends moving forward as well. While some growth investors will likely find Vanguard Dividend Appreciation ETF appealing, there are better investing options available to those seeking income or total returns.

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