VTI - VIG: Not A Safer Less Volatile Alternative To Total Stock Market Index Funds

2024-02-20 09:00:00 ET

Summary

• VIG is often considered a safer, less volatile way to invest in better quality stocks than what are found in total stock market funds.
• Backtesting VIG is misleading as its index and its holdings changed in Sept 2021. We discuss the impact of the change.
• We compare the top holdings of VIG to those of VTI, a popular total stock market ETF, finding them surprisingly similar and then explore which stocks are omitted from VIG.
• We compare VIG and VTI's performance during previous market shocks and find no compelling advantage for VIG. In fact, its current index and holdings will probably increase its volatility.
• Finally, we review its dividend and the impact of VIG's new index methodology on that dividend.

I have often seen the Vanguard Dividend Appreciation ETF ( VIG ) recommended as a safer, less volatile investment for those who might otherwise invest in a Total Stock Market ETF like the Vanguard Total Stock Market ETF ( VTI ) or the iShares Core S&P Total U.S. Stock Market ETF ( ITOT ) but believe they are dangerous now because of their concentration in the so-called "Magnificent 7" Tech stocks, Microsoft ( MSFT ), Apple ( AAPL ), Amazon ( AMZN ), NVIDIA ( NVDA ), Meta Platforms ( META ), Tesla ( TSLA ), and Alphabet ( GOOG ) ( GOOGL ).

Past Performance Appears to Suggest that VIG is Very Similar to VTI

There is a good reason so many investors see VIG as a reasonable alternative to total stock market ETFs. Any historical chart you can find online makes it clear that in the longer run VIG has performed almost as well as the most popular Total Stock Market ETF, VTI, save for the periods, like the year 2023, when enthusiasm for a few mega cap growth stocks has given the Vanguard Total Stock Market ETF a huge advantage....

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