ETFs Can Often Be Similar Until You Dig a Little

How are VIG and VYM similar and different?

Recently one of my readers asked me about ETF VIG. VIG is the Vanguard Dividend Appreciation ETF. The question he raised concerned my frequent recommendation to use VYM as one of your retirement investments. VYM is another great Vanguard ETF: Vanguard High Dividend Yield ETF. As you can see from the ETF names, they both have a dividend component. Furthermore, both have excellent Seeking Alpha ETF ratings. There is, however, one noticeable and significant difference when it comes to 10-year returns. VIG has a ten-year return of 171% while VYM only musters up 130%.

Some Other Differences Matter

The good news is that both ETFs have a low expense ratio. However, VYM has a slightly better dividend yield. This is due to the mix and weightings of the investments each fund holds. VYM has more diversification and has a smaller percentage of total assets in the top ten. This causes me to favor VYM over VIG. However, part of my reasoning for favoring VYM is really that I am more focused on income and am willing to give up some of the growth that VIG offers.

VIG’s Top 10 Holdings, Holdings Breakdown by Sector and Dividend Yield of 1.84%
VYM Top 10 Holdings, Holdings Breakdown by Sector and Dividend Yield of 2.88%

We must be careful. VIG is more heavily invested in the top ten stocks at 28.8% in the top ten while VYM clocks in at 22.4% in the top ten. If the top ten suffer disproportionately, it can make a difference in the price performance of the ETF. However, for the long-term investor this is not a primary concern.

Another significant difference has to do with the weightings of the investments by sector. VIG has more exposure to Technology, which can be and has been more painful in the short term for VIG. In other words, in the last six months VYM has outperformed VIG. That doesn’t disqualify VIG as a good investment, but wise investors do pay attention to sector weightings.

For VYM, the following sectors are the focus for more than 50% of the assets: Financials, Health Care, Consumer Defensive, and Industrials. Technology takes 5th place for VYM. VIG, on the other hand, has more than 50% of the assets in these sectors: Financials, Technology, Health care, and Industrials. In fact, almost 38% of the fund is in the first two (Financials and Technology), while 36% of VYM is in Financials and Health care.

Conclusion

If you are seeking growth over dividends, then VIG is probably your better choice. If, on the other hand, you want greater diversification, less exposure to the technology sector, and a slightly better dividend yield, then VYM might be the solution.

Of course, you could buy some of each. If you do that, remember that both funds hold some of the same stocks. That probably isn’t a big deal if you buy equal portions of both funds, but it is always wise to look at and compare the top ten investments in every ETF you plan to own.

Full Disclosure

Cindie and I own 2,325 shares of VYM as a long-term investment. We do not own shares of VIG.