VIG - VIG: A Fund That Is Better Positioned Now

2023-08-02 04:30:42 ET

Summary

• Investing environment has been volatile with pandemic, inflation, and signs of recession.
• Business cycles have been very short since 2020.
• VIG has rebalanced and the fund is well positioned for growth investors.

The investing environment has been very fluid over the last three years. With the pandemic, rampant inflation starting in early 2021, and now increasing signs of a recession, business cycles have been very short since 2020. While long-term investors obviously shouldn't change their strategies if their goals remain the same, capital allocation still has to take the economic and market environment into account.

One of the more popular exchange traded funds that has performed reasonably well despite trailing the S&P 500 and most of the broader indexes over the last decade is the Vanguard Dividend Appreciation Index Fund ETF ( VIG ).

Even though VIG's total returns are up 187.8% over the last decade, the S&P 500's ( SPY ) total returns are 221.11%.

I last rated VIG a hold when I wrote about this ETF in February of this year. I am not upgrading my coverage of this fund to a buy. The rate of inflation has come down, the Fed is likely near the end of rate increases, and the economy has already slowed, a severe recession remains an unlikely scenario. This is a growth fund that invests exclusively in large cap stocks that is also significantly overweight the technology and financial sectors, this ETF should benefit from the Fed easing the current rate cycle for multiple reasons.

The holdings of the Vanguard Dividend Appreciation Fund are 22.85% technology, 17.69% financials, 15.72% health care, 12.99% industrials, 11.84% consumer defensives, 7.42% consumer cyclical, 4.18% basic materials, 2.99% utilities, 1.23% communication, and 3.08% energy. This fund also holds .21% in cash and cash equivalents. The four largest holdings of this fund are Apple (AAPL), Microsoft ( MSFT ), Exxon Mobil ( XOM ), and UnitedHealth Group ( UNH ).

The expense ratio of this ETF is .06%, this fund has $70.51 billion dollars in assets under management, and the current yield is 1.87% in dividends that are paid out quarterly. VIG is a growth ETF, this investment has made out minimal income over the last decade, and the fund's heavily overweight position in the technology sector will also likely keep the yield low.

This fund has recently rebalanced nicely in the current market environment to focus more on large cap tech companies such as Apple and Microsoft, and the fund also notably increased the energy holdings as well from less than .2% to just over 3%. VIG still offers only minimal income, but this growth fund is well positioned for what will likely soon be an end to the current rate cycle because the fund is overweight more cyclical sectors such as technology and the financials, and this ETF also has less than 30% of the exchange traded fund's overall assets in more defensive sectors such as utilities and healthcare companies.

VIG invests exclusively in large cap companies, and the fund is well-positioned from what should be a continued pullback in the dollar as the current rate cycle in the US comes to an end and growth outside of the United State accelerates. Asia-Pacific has also been the slowest growing region for some time, but China and most of this region should see their economies recover faster moving forward now that the severe shutdowns that these countries continued even recently to impose are likely in the past.

Analysts are already expecting Macau to make a full recovery this year, and the dollar continues to ease against the Euro and most major currencies as well currency traders anticipate the current rate cycle coming to an end soon with July's inflation data coming in below expectations. This fund's core holdings in the financial and technology sectors that this ETF is overweight would benefit significantly from a falling dollar. The tech sector gets nearly 60% of their revenues from overseas, and the financials also tend to benefit from a falling dollar as yields rise.

VIG has performed well over the last decade despite underperforming the S&P 500 and the Nasdaq 100 during this time period. With inflation expectations coming down, the current rate cycle likely to slow, and the economy looking increasingly like a severe recession will be avoided, this ETF should be able to outperform most alternative growth funds in the current market environment.

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