As I have been looking more closely into dividend investing over the past few weeks I have noticed two distinct dividends ETFs which both look promising: VIG vs. VYM. Since they both offer an attractive alternative to more expensive funds such as DGRO and NOBL I thought it was worth taking a closer look at them to see which ETF is actually better, VIG or VYM?
VYM and VIG have the same expense ratio of 0.06%. VIG is less diversified than VYM holding only around 200 securities while VYM holds more than 400. Overall, VIG outperformed VYM with a compound annual growth rate (CAGR) of 9.10% vs. 7.38%.
But let’s look at this comparison in a bit more detail!
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VYM vs. VIG – Overview
In this article, we’ll look at some of the key differences between the two ETFs in terms of the index they follow, their expense ratio and net assets. We’ll also conduct a risk analysis to measure which ETF provides more stability and fewer drawdowns over time. Finally, we’ll conclude with a comparison of VIG’s and VYM’s historical performance over the past decade.
VYM vs. VIG – What’s The Difference?
|Name||Vanguard Dividend Appreciation ETF||Vanguard High Dividend Yield ETF|
|Index||NASDAQ US Dividend Achievers Select Index||FTSE High Dividend Yield Index|
The Vanguard Dividend Appreciation ETF (VIG) tracks the NASDAQ US Dividend Achievers Select Index. This index is comprised of a select group of securities with at least ten consecutive years of increasing annual regular dividend payments. Vanguard’s VIG tracks this index with a full-replication approach, aiming to fully mirror the index’s performance.
The Vanguard High Dividend Yield ETF (VYM) tracks the FTSE® High Dividend Yield Index. This index is made up of a select number of securities based on the forecast of paying out above-average dividends in the coming year. VYM also makes us of a full-replication approach with regards to the index.
When comparing both indexes tracked by VIG and VYM I find it striking that the NASDAQ US Dividend Achievers Select Index is much clearer defined than the FTSE® High Dividend Yield Index. Even on their website, FTSE remains rather vague about how exactly stocks are selected to be included in the index:
In other words, you don’t really know which companies you are actually investing in over the long term as dividend forecasts may change frequently. The advantage here goes to VIG in my opinion due to the stable index of the NASDAQ US Dividend Achievers.
VIG and VYM both have an expense ratio of 0.06% which can be considered fairly cheap in the ETF world. An expense ratio of 0.06% means that you would pay around $6 in fees for a $10,000 investment in VIG. No mutual fund can beat that!
Both ETFs have very low fees when compared to other players in the dividend ETF space such as DGRO and NOBL. DGRO still comes in fairly inexpensive at 0.08% while NOBL charges a whopping 0.35%. Even though there are cheaper ETFs such as Vanguard’s VTI at 0.03%, both VIG’s and VYM’s expense ratio is very affordable!
VIG and VYM are issued by Vanguard, one of my favorite ETF companies. Not only do they provide extremely low-fee funds for investors, but their entire philosophy is based on providing investors with the best options available in the market to succeed.
This combined with the fact that Vanguard investors also become shareholders of the fund they are invested in makes Vanguard an excellent choice as an ETF issuer.
You can read more about why I love Vanguard here.
VIG was started in early 2006. This was just a few years before the market crash of 2008 which will give us valuable insights into its historical performance and behavior during market downturns. Approaching its 14th anniversary this year there is plenty of historical performance data to look out for.
VYM was started a bit later than VIG, in late 2006.
Since both funds were issued around the same time we’ll have excellent data sets to compare both their performance accurately later on.
VIG has some $35.8B in net assets which makes it one of the largest funds out there. It may be the largest ETF that is focused on dividend growth (correct me if I’m wrong).
VYM’s assets total some $23.3B, about two-thirds the size of VIG.
Both funds have sufficiently large assets and trade volume so that liquidity and tradability should never be a problem with either one.
Next, we’ll take a look at how the two ETFs are composed in terms of their distribution between large-, mid- and small-cap stocks. This will give us insight into possible over- and underexposures in certain market segments we need to look out for.
This above pie chart shows the distribution of VIG’s holding between large-, mid-, and small-cap companies. Around 85% of VIG is made up of large-cap stocks. Mid-cap stocks make up 12.5% and the remaining 2.5% is filled by small-cap companies.
This distribution is not surprising considering that the percentages are based on the market cap of each stock and that this pie chart also roughly represents the entire U.S. stock market.
The equity market capitalization of VYM looks perhaps surprisingly similar to that of VIG. Large-cap stocks make up 86.5% while mid-cap stocks are around 10.8%. The remaining 2.7% are small-cap companies.
The difference between these two funds is minute: VYM tends to be a bit heavier in large-cap stocks while VIG has more assets of mid-cap companies in its holdings. The small difference of just one or two percent should not be of much concern to the average investor.
In the following section, we’ll examine the industry exposure of both VIG and VYM.
If you’re considering combining several ETFs in your portfolio you might want to make sure that you are equally exposed to all sectors of industry. These charts may also make us aware of shortcomings in the index’s policy, excluding or over-including certain sectors.
What is striking about the above chart is that VIG’s holdings are predominantly industrials; they make up nearly one-quarter of all holdings. This is somewhat closely followed by the consumer defensive sector at around 15% as well as healthcare and technology at roughly 12%.
There is no exposure to the real estate sector visible since REITs are excluded from the fund.
The above differences in sector exposure are perhaps not surprising when we think back to the index that VIG tracks: only companies that have increased their dividends for 10 consecutive years or more are included. The stability of the industrial sector lends itself to this type of criteria. Case in point: the longest dividend payer out there is American States Waters with a 65-year track record of increasing their dividends.
VYM is heavily exposed to the financial services sector at close to 20%. Consumer defensive and healthcare make up roughly 15% of the fund’s assets. REITs are excluded from VYM as well so you will see no exposure to the real estate sector here.
This distribution of percentages can also be explained quite nicely by the index’s policy. High dividend-paying stocks without the requirement of a track record in increasing their payouts tend to be financial services. Basic materials, energy, and industrials tend to be more slow-moving sectors.
When comparing the industry exposure of VIG and VYM it is apparent that they are focused on entirely different sectors of the market. VIG’s heavy exposure to industrials is almost mirrored by VYM’s exposure to financial services, although not as heavily pronounced.
Overall VIG appears to be a bit more imbalanced than VYM. The heavy reliance on industrials could make it harder for VIG to keep up in bull markets. VYM, on the other hand, may struggle in recessions and market crashes – more than other funds – because of its heavy reliance on the financial sector.
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VYM vs. VIG – Analysis
Now, we’ll take a look at some of the risk metrics associated with volatility and maximum drawdowns. This may be especially important to the conservative investor aiming for stability in growth.
|Downside Deviation (monthly)||2.58%||2.91%|
|US Market Correlation||0.96||0.95|
With a monthly volatility of just 3.74% and an annualized volatility of 12.96% VIG seems to be a fairly stable option for investors. Both metrics are below the average volatility of the entire U.S. stock market on a monthly and annual basis.
VYM, on the other hand, tends to see a monthly volatility of 4.11% and an annualized one of closer to 15%.
This difference may be due to the fact that companies with a longer history of increasing their dividend payout tend to have a more stable growth curve and are less impacted by market fluctuations. In terms of mitigating the impact of market volatility, VIG seems to be the clear winner.
VIG’s maximum drawdown during the last crash was around 40%. Comparing this to VYM whose drawdown surpassed 50% during the same time frame it becomes obvious that VIG is the better choice for the risk-averse investor.
The following chart illustrates what I have alluded to before: we are able to compare the valuable historic data of the 2008 market crash.
VIG vs. VYM – Performance
In the previous sections, we have looked at some key differences between VIG and VYM. We have seen how they differ in their fund composition and industry exposure. During the risk analysis, we have also noticed the difference in volatility and drawdowns between the two funds.
For this next part, we will see how the above differences are reflected in the fund’s overall historical returns.
The first thing that is apparent when looking at this chart is the striking difference in performance in times of economic downturns. Just looking at the bars for 2008 and 2009 and the current market crash of 2020 we can see how much better VIG performs in those kinds of situations.
In times of economic boom as were the years from 2011-2016 VYM seems to have a slight edge over VIG. However, also in months leading up the current downturn, we see VIG outperforming VYM by a large margin.
|Portfolio||Initial Balance||Final Balance||CAGR|
The chart above illustrates the hypothetical growth of $10,000 USD if invested at the inception of both ETFs in 2006:
$10,000 in VIG would have resulted in around $28,000 today while VYM would have yielded around $23,800. This difference in overall performance is significant.
Just looking at the graph we see how much VIG has outperformed VYM over time. Not only in market downturns but also in boom times the overall portfolio value of VIG almost always surpasses that of VYM.
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So, is VIG really that much better than VYM? Our analysis so far would lead us to think so.
Looking at the data and especially the annual returns it is obvious that VIG is the overall better choice than VYM. For my personal portfolio, I have chosen VIG as well due to its sustained dividend appreciation over time. The only risk factor that might be more pronounced with VIG is, in my opinion, the fund’s heavy exposure to industrials. This, however, can be compensated by adding other less industry-heavy ETFs to your portfolio.
For investors looking to receive high dividend payment this year or in the near future VYM might be a suitable option. Nonetheless, I would encourage every investor aiming for a steady income stream through dividend investing to adopt a long-term mindset and approach.
What are your thoughts on VIG vs. VYM? Is VIG the clear winner?
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nice analysis… which would you say performs better during a bear market or is more affected by inflation… stocks are so high now – if you assumed the market were to cool and drop – which might be a better choice?