Why This Vanguard ETF Is Hugely Popular -- Despite Underperforming the Market

For those looking to invest in exchange-traded funds, the sheer number of different choices can be intimidating. For the most part, investors choose ETFs based on which fund is most likely to deliver the best returns. But because there are so many different categories of ETFs to choose from, investors who have a particular goal in mind might sometimes pick funds that don't maximize total return but instead have other attractive features.

Dividend investing is a good case in point. Investors who emphasize stocks that can generate income that they pay out to shareholders through dividends aren't always looking for the top-growth candidate. Instead, a history of reliable business performance that supports predictable payouts to investors can be the most attractive attribute for such a stock. The Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) seeks to identify the best such dividend stocks, and in this second in a three-part series of articles on the Vanguard ETF for the Voyager Portfolio, you'll learn more about how the fund has performed strongly even though it hasn't been able to keep up with broader indexes like the S&P 500.

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A smoother ride

When you look at the returns of the Vanguard Dividend Appreciation ETF and compare them to broader market indexes, a pattern emerges. The ETF's relative performance has been substandard during extremely strong years for the market. For instance, in 2021, the fund was among the bottom 20% of ETFs in the large-blend category. Performance in the bull market years of 2023 and 2024 was equally poor, with the fund trailing the S&P 500 by 12 and eight percentage points respectively during those two years.

However, Vanguard Dividend Appreciation ETF stands out during the toughest years for the market. During the last bear market in 2022, the Vanguard ETF didn't avoid losing money, but its losses for the year were only half what the S&P suffered. That outperformance of 10 percentage points was enough to put the ETF among the top 10% of large-blend funds during that year. Similarly, Vanguard Dividend Appreciation was a top-10% ETF during the market-losing year in 2018.

All told, the market has been up many more years than it has been down, and so Vanguard Dividend Appreciation's overall returns have lagged the market. Total returns of 12.26% per year over the past decade and 11.84% per year over the past 15 years trail the S&P by between 1.5 and 2 percentage points per year. Yet on an absolute basis, those returns are still impressive, and Vanguard Dividend Appreciation has been able to make income payouts that far exceed what you'd get from an ETF tracking the S&P 500.

Showing investors the money

Incorporated into those returns is the fact that Vanguard Dividend Appreciation makes distributions of its dividend income to its shareholders. During 2025, those distributions added up to about $3.56 per share. That works out to a yield of around 1.7% based on recent share prices.

That might not seem like much, but it's quite a bit more than the 1.1% you'd get from an S&P fund or the 0.5% yield that popular Nasdaq 100 index trackers pay. And more importantly, the payout has increased dramatically over time. In 2021, you would have gotten about $2.67 per share in dividend distributions from the ETF. That works out to a 33% increase in dividend payments in just four years.

How is Vanguard Dividend Appreciation set to do in 2026 and beyond?

Investors sometimes look backward at performance, but the true measure of an ETF is how it will do in the future. In the third and final articles on the Vanguard dividend ETF for the Voyager Portfolio, you'll get a close look at how the fund is positioned for what's to come and whether it fits well with your investing goals.

Dan Caplinger has positions in Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.