For the past weeks I have not been able to decide which ETF to buy: DGRO vs. VIG. Which ETF offers better returns? Which ETF offers better diversification? As DGRO is a fairly new player in the ETF space there is not a ton of information online. But I dug a little deeper…
Here is what I found. In terms of overall returns DGRO is better than VIG. DGRO has an compound annual growth rate (CAGR) of 9.51% while VIG’s CAGR is 9.12%. However, these metrics come with a huge caveat: DGRO’s inception date was in December 2014 and as a result, the back-testing for this index fund is very limited.
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VIG vs. DGRO: Overview
Still there are many features about DGRO that really like despite its relatively short history.
So in this post I’ll dive into some of the key difference between both ETFs. We’ll look at some key facts such as net assets, expense ratio and dividend yield as well as fund composition and industry exposure.
In the further sections we’ll also take a look at potential risks in terms of volatility and maximum drawdowns. And probably the most important part: comparing the historical performance of DGRO and VIG.
But let’s start with the basics:
VIG vs. DGRO – What’s The Difference?
| VIG vs. DGRO | DGRO | VIG |
| Name | iShares Core Dividend Growth ETF | Vanguard Dividend Appreciation ETF |
| Index | Morningstar US Dividend Growth Index | NASDAQ US Dividend Achievers Select Index |
| Expense Ratio | 0.08% | 0.06% |
| Issuer | iShares | Vanguard |
| Structure | ETF | ETF |
| Inception Date | 6/10/2014 | 4/27/2006 |
| AUM | $7.44B | $31.3B |
| Shares Outstanding | 265M | 351M |
Issuer
The DGRO ETF is from iShares one of the biggest worldwide companies in the index fund market managed by BlackRock, the world’s largest asset management company. VIG on the other hand was created by Vanguard, probably the largest and most trusted exchange-traded fund company in the U.S. which operates at-cost.
Net Assets
Net assets of DGRO at 9.73B are almost five times less those of VIG which makes sense when considering how much longer VIG has been established. Tradability is not an issue with either one of these ETFs as they both have plenty of volume for liquidity.
Dividend Yield
Currently – and during most times – DGRO has a higher dividend yield than VIG. This is because DGRO only requires companies to have a track record of increasing dividends for 5 years. Those companies will on average pay a higher dividend yield than companies who have increased their dividends for over a decade.
Expense Ratio
The expense ratios are pretty similar at 0.08% for DGRO and 0.06% for VIG. Both can be considered fairly cheap compared to other ETFs. With large capital investments and over a long period of time the 0.02% difference in fees can have make an impact on your portfolio, however, this might be balanced out by a better performance of DGRO as we will see later.
Inception Date
As mentioned earlier, DGRO is almost a decade younger than VIG. This makes comparing the two funds difficult when it comes to historical performance. DGRO has not yet lived through a market crash or recession as VIG has in 2008. Comparing performance during a recession is crucial when analyzing historical returns.
Investment Objectives
The iShares Core Dividend Growth ETF (DGRO) seeks to track the investment results of an index composed of U.S. equities with a history of consistently growing dividends. More concisely this means that DGRO includes companies that have increased dividends for the past 5 years. Another requirement is that they dividend payout represent less than 75% of earnings.
The Vanguard Dividend Appreciation Index Fund ETF Shares (VIG) seeks to track the performance of the NASDAQ US Dividend Achievers Select Index (formerly known as the Dividend Achievers Select Index). This includes companies that have increased their dividends for at least 10 years.
Fund Composition
Equity Market Capitalization of DGRO
DGRO holds a solid blend of large cap, mid cap and small cap companies which roughly represents the entire U.S. stock market. Compared to VIG it is weighed slightly in favor of larger cap companies as it will include tech giants such as Apple that have increased dividends for just over 5 years as of now.
Equity Market Capitalization of VIG
VIG’s fund composition looks similar to that of DGRO and the entire U.S. stock market. It’s weighed a bit more towards mid cap and small cap companies as large tech companies and other large cap companies that have increased dividends anywhere between 1-10 years are not included.
Overall the difference in composition between these two ETFs is minute and will not affect risk tolerance or diversification in any way. Personally, I like to see funds that lean a little more away from giant corporation that make up a large portion of the the fund’s assets. However, this is not the case with either one of these.
Industry Exposure
The small difference in fund composition is not reflected in the industry exposure: the biggest industry sector which is represented in DGRO are financial services which make up almost 20% of total assets. This is followed by technology with around 17% and healthcare at 15.5%.
DGRO has no exposure to the real estate sector and very little to basic materials and energy companies. If we look at VIG, there are significant differences:
VIG is much heavier focused on industrials making up almost 24% of the entire fund. The following sectors of industry are fairly evenly distributed among consumer goods, healthcare, financial services and technology, all around 12% of net assets.
This distribution makes sense if you think back to VIG’s premise: only to include companies that have increased dividends for at least 10 years. Those dividend achiever or even dividend aristocrats tend to be either mostly industrials.
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VIG vs. DGRO – Analysis
We have looked at some of the key differences between DGRO and VIG in terms of composition and industry exposure.
Next we will explore what effects these difference have in terms of risk: volatility and max. drawdowns.
Key Metrics
| Risk Metrics | DGRO | VIG |
| Volatility (monthly) | 3.46% | 3.34% |
| Volatility (annualized) | 11.99% | 11.58% |
| Downside Deviation (monthly) | 2.25% | 2.19% |
| Max. Drawdown | -10.43% | -11.00% |
| US Market Correlation | 0.97 | 0.95 |
With 3.46% monthly and almost 12% annualized volatility DGRO is a bit more volatile than VIG. As we have seen earlier DGRO is far heavier balanced towards financial services and technology companies, both industry sectors which tend to be more volatile overall.
The fact that big tech companies make up a much larger percentage of total assets of DGRO plays a big role in the ETFs voliatility as well as those tech giants are much more susceptible to market swings than industrials.
Interestingly enough, VIG sees a higher max. drawdown of 11% while DGRO remains just shy of a maximum drawdown of 10.5%. This can lead us to conclude that VIG is more attuned to long-term market swings – as is often the case with slower to react sectors such as industrials.
The following chart illustrates that point quite nicely:
We can see here that in the bull years of 2014 to 2017 DGRO experienced significantly lower drawdowns than VIG, mostly due to the stability and relentless growth of the financial and tech sector during that time.
What we see today as of this month, however, is that DGRO is dealing with the current Corona-fueled market sell-off far worse than VIG is. I will keep a close eye on how this pans out in the near future. We might even see VIG overtake DGRO in overall returns due to a sustained drawdown of tech and financial stocks.
VIG vs. DGRO – Performance
We have compared key facts, measured risk and looked at drawdowns. But does all of this tell us? How does this translate into real-life market performance and total returns. In other words: what would have happened if I had invested 10,000 USD into each fund back in 2014?
Let’s have a look!
Historical Annual Returns
What strikes me about this chart is that in years of economic growth DGRO beats VIG hands-down in overall returns as is very apparent in 2016, 2017 and 2019. Yet in years of economic uncertainty or decline we see VIG hold its ground much more so than DGRO.
And it is here that the research we did earlier really off: knowing the fund composition and industry exposure as well as their investment objective gives us a clear explanation for this disparity in performance. Financials and technology stocks are heavily dependent on economic growth, industrials far less.
So, what happens if we had invested $10,000 back in 2014. Which ETF would have performed better?
Backtesting Hypothetical Growth
It’s certainly a close race towards the end although we can see that DGRO was ahead for most of that race.
The $10,000 invested in DGRO would have turned into $15,989 while VIG would have yielded $15,700. In terms of overall returns so far we have a rather clear winner: DGRO.
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Conclusion
So, what does all of this mean? Is DGRO actually better than VIG?
It’s hard to say which ETF is really “better” than the other. They have somewhat different investment objectives and react to market swings differently. When looking at the returns it seems obvious to pick DGRO over VIG.
But keep in mind this important caveat: we only have very little historic data to draw this conclusion. Although DGRO’s returns look very promising, 5 years is not a sufficient time frame to establish that DGRO offers superior returns over the long-term.
Instead of deciding which ETF is better, I would like to suggest a different conclusion: DGRO and VIG complement each other very well!
So, here’s my suggestion: why not use both DGRO and VIG in out portfolios, but invest and collect their dividends through an innovative no-commission broker like M1 Finance.
Make use of the strong growth potential and stable dividend payout of DGRO and at the same time why not balance this growth with exposure to more conservative industry sectors with sustained dividend appreciation.
In my view, that is the best of both worlds!
What do you think? Are you going to buy DGRO or stick with Vanguard’s VIG?
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Great review of DGRO and VIG. I’m looking or a fund/ETF as a defense against downturns, so instead of putting all of my ‘eggs’ into one basket, I too will probably invest in both.