Vanguard has been a pioneer in the mutual fund industry for years, particularly known for its emphasis on index mutual funds while also offering a wide range of actively managed funds. When exchange-traded funds (ETFs) emerged, Vanguard promptly introduced index-focused ETFs, which was a logical step. However, there is some redundancy in the company’s product lineup.
One area of interest is within the dividend growth category, where the Vanguard Dividend Appreciation Index ETF (VIG) overlaps with the Vanguard Dividend Growth Fund (VDIGX). Which option is preferable?
Mutual funds are a traditional investment vehicle that allows individual investors to pool their money and invest with professional money managers, enabling cost-effective and diversified portfolios. Vanguard provides both index-based and actively managed mutual funds, giving investors a choice in investment strategies.
In contrast, ETFs offer intraday trading flexibility, as large shareholders can receive underlying stocks directly from the sponsor to maintain close alignment with the ETF’s net asset value (NAV). This feature, combined with strict portfolio construction rules in index ETFs, makes them a popular choice for many investors.
When comparing two Vanguard products with similar objectives but different management styles, such as the Vanguard Dividend Appreciation Index ETF and Vanguard Dividend Growth Fund, performance can vary over time. While these products have historically shown similar returns, recent performance trends have slightly favored the ETF.
The Vanguard Dividend Appreciation Index ETF tracks the S&P U.S. Dividend Growers Index, focusing on companies that have consistently raised dividends for at least a decade while excluding high-yielding stocks that may signal financial instability. With a market-cap weighting approach, the ETF’s performance is influenced by larger companies in the index.
The Vanguard Dividend Growth Fund employs active human managers to oversee its stock holdings, focusing on high-quality companies committed to growing dividends over time. With flexibility in stock selection and weighting, the fund holds around 40 stocks compared to the ETF’s 330. While the ETF has a more concentrated portfolio in technology, the mutual fund emphasizes healthcare stocks, which represent its largest sector exposure. The top three industry categories in the ETF (tech, financials, healthcare) make up over 60% of its portfolio, while the mutual fund’s top three sectors (healthcare, industrials, tech) account for about half of its portfolio. The differing decisions by human managers result in a tilt away from giant technology stocks towards healthcare. The mutual fund’s ability to adjust its portfolio in real-time based on market conditions is a key advantage over the ETF, which can only rebalance once a year to track the index. In the event of a technology market downturn, the mutual fund’s selective approach may prove beneficial. While index funds have generally outperformed actively managed funds, the performance similarity between the ETF and the mutual fund suggests that indexes may not be the best approach in every case. Despite recent ETF performance advantages, the mutual fund’s deliberate reduction in technology exposure highlights its unique strategy. Investors should note that the human-managed mutual fund comes with a slightly higher expense ratio of 0.29%.
Consider investing in the Vanguard Dividend Growth Fund, which has an expense ratio of 0.05% for the ETF. This cost may be justified if you value the ability of managers to adjust to market conditions as they arise, even if it temporarily puts them at odds with the market. Before purchasing $1,000 worth of Vanguard Specialized Funds – Vanguard Dividend Growth Fund, take into account that it was not among the top 10 stocks recommended by The Motley Fool Stock Advisor analyst team. The 10 selected stocks have the potential to deliver significant returns in the future, similar to Nvidia which saw substantial growth after being recommended in 2005. Stock Advisor provides a comprehensive investment strategy, including portfolio building guidance and regular updates on stock picks. The service has outperformed the S&P 500 since 2002. Don’t miss out on the latest top 10 list by joining Stock Advisor today.
