Is the Vanguard Dividend Appreciation ETF a Buy Now?

Not all dividend exchange-traded funds (ETFs) are the same. There are two very broad types of domestic dividend ETFs -- those that seek the highest dividend yields and those that focus on stocks that consistently increase their dividends.

Within those categories, there are many different variations, and some look to achieve both.

The largest dividend ETF in the world, the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG), falls into the latter camp. This ETF tracks the S&P U.S. Dividend Growers Index, which includes stocks that have increased their dividends for at least 10 years in a row.

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Further, the index actually excludes the top 25% highest-yielding stocks, likely to weed out those high-flying yields that may be unsustainable. So the yields for the Vanguard Dividend Appreciation ETF are not going to be as high as, say, the Schwab US Dividend Equity ETF (NYSEMKT: SCHD), which focuses on high-yielding stocks.

For example, the Vanguard Dividend Appreciation ETF has a 30-day SEC distribution yield of 1.56%, while the Schwab U.S. Dividend Equity ETF has a 30-day yield of 3.48%.

But the returns for the Vanguard ETF are lagging, too, right now.

Vanguard Dividend Appreciation sees recent outflows

According to ETF Database, the Vanguard Dividend Appreciation ETF saw about $790 million in net outflows on March 20, one day after the aforementioned Schwab ETF had $15 billion in net inflows.

The latter's surge was likely due to its annual reconstitution happening this week, and some of that may have come from investors switching over from the Vanguard Dividend Appreciation ETF to the newly reconstituted, higher-yielding SCHD ETF.

Because it focuses on dividend growers as opposed to high yields, the Vanguard ETF tends to have a lot of low-yielding tech stocks. Its three largest holdings are Broadcom, Apple, and Eli Lilly, with Microsoft fourth. None of these stocks is known for its high dividends. They are known for their massive returns, which is why the VIG has a great long-term track record with better returns than SCHD over the past three-, five-, and 10-year periods.

But year to date, with large-cap tech stocks lagging the markets, the VIG is also down -- roughly 2%. In contrast, the Schwab ETF is up about 11% because it focuses on more stable, value-oriented stocks with high yields.

This is just a short-term snapshot, but it is telling for investors who are looking for more diversification right now. The Vanguard Dividend Appreciation ETF has largely tracked with the large-cap indexes. On the other hand, dividend ETFs that focus more on yields, along with stable fundamentals and stocks with lower valuations, offer much better diversification right now.

If I had to invest in one dividend ETF right now, considering the uncertain market conditions, I would probably look for an ETF in the latter camp that provides higher dividend income and is a better diversifier against large-cap tech stocks.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, and Vanguard Dividend Appreciation ETF and is short shares of Apple. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.