The Smartest Vanguard ETF to Buy With $1,000 Right Now
Key Points
The rotation back into tech over the past month has made some very familiar ETFs leaders once again.
It may seem counterintuitive, but the Vanguard Dividend Appreciation ETF is one of the funds that benefits.
Its overweight to mega-cap tech stocks puts it into position to lead in the dividend ETF category.
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Dividend exchange-traded funds (ETFs) haven't exactly been in favor over the past few years with tech and AI stocks dominating the markets. However, the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) has been in a unique situation to take advantage of this.
This fund has a roughly 23% allocation to tech stocks, among the highest you'll find in this category. To understand why, you need to dig further into how the portfolio is constructed. It's done in a way that could give it a real advantage in the current market.
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Key takeaways
- VIG aims to invest in companies with at least 10 consecutive years of annual dividend growth, making it one of the purest dividend growth strategies in the marketplace.
- The dividend growth requirement screens out weak balance sheets and cyclically vulnerable businesses, but it also limits dividend yield potential.
- Its market cap-weighting methodology gives the fund a tech overweight, which has helped performance over the past month.
- With the market rotating back to tech and growth stocks, VIG may be uniquely positioned within the dividend ETF universe to take advantage.
VIG: Why it's a good time to buy
The Vanguard Dividend Appreciation ETF's strategy of targeting stocks with a 10-year minimum of annual consecutive dividend growth is fairly straightforward. So is its choice to eliminate the top 25% of yields to avoid potentially more volatile yields or traps.
But its decision to market cap-weight the portfolio produces interesting results for a dividend ETF. This strategy ignores any dividend-related metric and just gives the biggest companies the biggest weights. That means Broadcom, Apple, and Microsoft are currently the fund's three largest holdings, with a combined weight of 12%.
That gives the fund a slightly-higher-than-average risk profile among dividend ETFs, but that can work to its advantage when tech stocks are running. With inflation rising due to the Iran war and resulting in the Fed likely being unable to cut rates, rate-sensitive stocks are turning into underperformers.
That will certainly affect a portion of the Vanguard Dividend Appreciation ETF's portfolio too, but the return of tech leadership could also give it a boost.
VIG: Performance and key metrics
| Metric | VIG |
|---|---|
| Expense ratio | 0.04% |
| Assets under management | $99 billion |
| Dividend yield | 1.7% |
| 1-year return | 22.1% |
| 3-year annualized return | 15.2% |
| 5-year annualized return | 10.4% |
| # holdings | 334 |
Data source: Vanguard.
AI spending is likely to drive economic growth for the foreseeable future. But with signs emerging that the U.S. economy is slowing in the background, the relative quality and safety of mega-cap tech isn't the worst place to be positioned.
Strong corporate earnings should help put a floor under share prices. The tech overweight could certainly make the Vanguard Dividend Appreciation ETF a leader within the dividend ETF category. Its natural defensive construction should also provide some buffer if the economy continues to weaken.
It's the type of fund that's built for the current environment.
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David Dierking has positions in Apple and Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Apple, Broadcom, Microsoft, and Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.
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