Is the Vanguard Dividend Appreciation ETF a Buy Now?

The Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) has had a tough start to 2026. Sure, it's beating the S&P 500 by about 3 percentage points year to date (as of Feb. 9), but it's ranking well in the bottom half of the U.S. dividend ETF category.

A big reason for this is how the fund is constructed. It starts with a large U.S. stock universe and pulls out those with a 10-year or longer streak of growing their dividends annually. It eliminates real estate investment trusts (REITs) and the top 25% of yields from consideration, which helps to explain its current relatively low 1.55% yield.

The biggest issue, however, is that the fund is market cap-weighted. It doesn't give any particular favor to companies with longer dividend growth histories or better balance sheet quality. It simply takes all qualifying components and gives larger weights to bigger companies.

This is why you see Broadcom, Microsoft, and Apple as the top three holdings -- with a combined weight of 15% -- despite the fact that they all yield less than 1%. This is why the fund has a 27% allocation to tech stocks, one of the highest exposures among dividend ETFs.

That was fine when mega-cap tech was leading the market higher. It's not so fine now that tech is one of the worst-performing sectors of 2026 so far. With the current market rotation well underway, how does the Vanguard Dividend Appreciation ETF look right now?

Image source: Getty Images.

Tech underperformance is a headwind

As far as relative performance within the dividend ETF universe, this ETF will live and die by its tech exposure. That has helped performance tremendously over the past three years, when tech and AI trades were thriving. However, it has been a drag in 2026.

Relative to the S&P 500, however, the Vanguard Dividend Appreciation ETF has done quite well. The fund still leans heavily into more durable and defensive names. That means it will likely still outperform the broader market when tech and growth stocks are out of favor.

But with such a large tech overweight, we're probably looking at an environment where it can beat the S&P 500 but lag the broader dividend ETF universe.

Macro conditions don't look favorable

The market is still pricing in two rate cuts by the end of the year, but that's far from a done deal. The current version of the Fed has consistently shown a hesitance to cut rates in an economy where gross domestic product is growing at a 4% annualized rate and inflation is still hovering close to 3%. Those aren't typically the conditions that warrant rate cuts, and it feels like the Fed consensus might agree.

Without the added benefit of lower rates, stocks might have a bit of a tougher time generating gains. That's not to say, of course, that it can't be done, but the markets have often traded higher on the expectation of looser conditions. Without that, the tailwind could disappear.

A cooling jobs market could also be a warning sign. That usually indicates recession risk.

Is the Vanguard Dividend Appreciation ETF a buy now?

The bullish argument is that the economy will keep growing, earnings growth will look healthy, and inflation will trend back to the Fed's 2% target.

The bearish argument would be that the slowing jobs market is a sign of broader economic trouble, and stocks will move lower as a result.

Based on these conditions, I believe the likeliest outcome is that this ETF will outperform the S&P 500 along with other dividend funds, but lag the dividend ETF group on average.

David Dierking has positions in Apple and Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Apple, Microsoft, and Vanguard Dividend Appreciation ETF. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.