1 Long-Term Dividend ETF Built to Outlast Any Market Cycle Over 20 Years
Experienced market participants know that when one invests long enough, one encounters a variety of cycles, including bull and bear markets, as well as periods in which stocks chop along, doing little.
Obviously, prolonged bull markets are most investors’ preference, but bear markets are facts of life. On average, those circumstances pop up once every 3.5 years and last nearly 10 months. The difficulty many investors encounter is timing market cycles, which is why it’s always nice to have exposure to strategies that can be durable across various market “seasons.”
This Vanguard dividend ETF has all-weather potential. Image source: Getty Images.
Some exchange-traded funds (ETFs) accomplish that objective, including the famed Vanguard Dividend Appreciation ETF (VIG +0.35%). Let’s examine why this fund is appropriate for long-term investors of all stripes.
To VIG for income and upside
Regarding this Vanguard fund, the largest ETF in the dividend category, a couple of disclaimers are important. First, as no- and low-yielding growth stocks have led U.S. stocks higher, dividend payers lagged the broader market. Second, dividend stocks and ETFs don’t provide full protection during bear markets.
All that said, this Vanguard ETF sported lower annualized volatility and lower maximum drawdown than the S&P 500 over the decade ending Aug. 4. The VIG ETF has another feather in its cap. It’s one of the most durable long-term performers in its category. Over the 10 years ending July 31, just four domestic dividend ETFs beat this Vanguard fund.
For investors who aren’t familiar with this ETF, it’s worth exploring how that success was attained. The Vanguard fund tracks the S&P U.S. Dividend Growers index, which is a collection of stocks with dividend increase streaks of at least 10 years. To boot, the index excludes the top 25% of highest-yielding names, implying the Vanguard fund isn’t littered with a bunch of yield traps.
Vanguard Dividend Appreciation ETF
Today’s Change
(0.35%) $0.86
Current Price
$245.23
Key Data Points
AUM
$130B
Dividend Yield
1.46%
Expense Ratio
0.04%
Top Holdings
AVGO
4.55%
AAPL
4.22%
LLY
4.15%
To be sure, those are important facts, and they reveal other attributes of this Vanguard ETF’s potential sturdiness across various market climates. Broadly speaking, dividend growth stocks, of which this ETF holds 322, are less volatile than the broader market. Second, over the long term, dividend growth can beat inflation, assuming 1970s- or 2022-style price increases don’t materialize.
Fees and flexibility help
Many dividend ETFs, particularly those of the high-yield variety, are heavily allocated to defensive sectors. That can be advantageous or less bad when markets decline, but that methodology can leave investors wanting more when stocks rally. Additionally, too much emphasis on defensive sectors can leave investors underexposed to new sources of payout growth.
This Vanguard ETF is more flexible. For example, it devotes 26.3% of its weight to tech stocks. In bygone eras of dividend investing, it would’ve been unthinkable for a dividend ETF to have such a large weight to tech equities, but times change, and this ETF is rolling with those changes. That is to say, when tech stocks are leading markets higher, this dividend fund offers investors some participation in that trend.
Something else that never goes out of style is the benefit of low-cost ETFs. This Vanguard fund definitely checks that box as its annual expense ratio is just 0.04%, or $4 on a $10,000 stake. That’s far below the category average of 0.72%, and it’s confirmation that this fund is appropriate for long-term investors.
